Question

Bond Discount, Entries for Bonds Payable Transactions?

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $8,600,000 of 10-year, 8% bonds at a market (effective) interest rate of 10%, receiving cash of $7,528,249. 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 $7,528,249 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

1)	Date	Account titles & Explanations				Debit	Credit
	1-Jul	Cash				7,528,249
		Discount on bonds				1,071,751
		bonds payable					8,600,000
2)	31-Dec	interest expense				397588
		discount on bonds		(1071751/20)			53588
		cash	(8,600,000*4%)				344000
3)	30-Jun	interest expense				397588
		discount on bonds		(1071751/20)			53588
		cash	(8,600,000*4%)				344000
4)		Yes
5)
		Principal				8,600,000
		interest				344000
		Calculation of bond issue price
		Where
		i=	5.00%
		t=	20 years
		principal		*	PV of $1 at 5% for 16 yrs =
		8,600,000		*	0.37689		=	3241254
		interest		*	PV of ordinary annuity at 5%=
		344000		*	12.46221		=	4287000
		bond issue price						7528254
		so
		present value of the face amount						3241254
		present value of the semi-annual interest payments						4287000
		price received for bonds						7528254	answer