Question

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $8,900,000 of 8-year, 9% bonds at a market (effective) interest rate of 11%, receiving cash of $7,968,868. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1. For a compound transaction, if an amount box does not require an entry, leave it blank.

2. Journalize the entries to record the following: For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answer to the nearest dollar.

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method.

b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. Round your answer to the nearest dollar.

3. Determine the total interest expense for Year 1. Round to the nearest dollar.
$

4. Will the bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest?

5. Compute the price of $7,968,868 received for the bonds by using Table 1, Table 2, Table 3 and Table 4. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.

Present value of the face amount	$
Present value of the semi-annual interest payments	$
Price received for the bonds	$

Answer 1

Solution:

Part 1 ---

Date	Accounts	Debit	Credit
July 1, Year 1	Cash	$7,968,868
	Discount on Bonds Payable (bal. fig)	$931,132
	Bonds Payable		$8,900,000

Part 2 –

Discount on Bonds Payable = $931,132

Semi Annual period to maturity = 8 Years x 2 = 16

Under straight line method Discount is amortized over the life of the bonds and each half yearly amortization amount will remain same.

Semi Annual Discount Amortization = Total Discount 931,132 / Period to maturity 16 = $58,196

Event	Date	Accounts	Debit	Credit
2(a)	Dec 31, Year 1	Interest Expense	$458,696
		Discount on Bonds Payable (Amortization)		$58,196
		Cash Interest Payable    (Face Value 8900,000*Coupon Rate 9% * Half yearly 1/2)		$400,500
2(b)	June 30, Year 2	Interest Expense	$458,696
		Discount on Bonds Payable (Amortization)		$58,196
		Cash Interest Payable (Face Value 8900,000*Coupon Rate 9% * Half yearly 1/2)		$400,500

Part 3 – Total Interest Expense for Year 1 = $458,696 (refer entry 2(a)

Part 4 --- Yes

Market interest rate is higher than coupon rate. The investor will earn higher money if he invest in market since the market interest rate is higher than coupon rate. That is the reason of bonds proceeds be less than the face amount.

Part 5 –

Part 5 –

Present value of the face amount (Face Value $8,900,000* Present Value factor at 5.5% for 16 period i.e. 0.42458)	$3,778,762
Present value of the semi-annual interest payments (Semi Annual Coupon Interest $400,500 x Present Value Annuity factor at 5.5% for 16 period i.e. 10.46216)	$4,190,095
Price received for the bonds	$7,968,857

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