In: Accounting
On July 1, 2016, Merideth Industries Inc. issued $35,400,000 of 10-year, 10% bonds at a market (effective) interest rate of 12%, receiving cash of $31,339,478. 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, 2016.* | ||||
2. | Journalize the entries to record the following:*
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3. | Determine the total interest expense for 2016. | ||||
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 $31,339,478 received for the bonds by
using the tables shown in Present Value Tables. (Round to the
nearest dollar.)
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Present Value Tables
Two present value tables are provided: Present Value of $1 at Compound Interest Due in n Periods and Present Value of Ordinary Annuity of $1 per Period. Use them as directed in the problem requirements.
Present Value of $1 at Compound Interest Due in n Periods |
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Periods | 4.0% | 4.5% | 5% | 5.5% | 6% | 6.5% | 7% |
1 | 0.96154 | 0.95694 | 0.95238 | 0.94787 | 0.94340 | 0.93897 | 0.93458 |
2 | 0.92456 | 0.91573 | 0.90703 | 0.89845 | 0.89000 | 0.88166 | 0.87344 |
3 | 0.88900 | 0.87630 | 0.86384 | 0.85161 | 0.83962 | 0.82785 | 0.81630 |
4 | 0.85480 | 0.83856 | 0.82270 | 0.80722 | 0.79209 | 0.77732 | 0.76290 |
5 | 0.82193 | 0.80245 | 0.78353 | 0.76513 | 0.74726 | 0.72988 | 0.71299 |
6 | 0.79031 | 0.76790 | 0.74622 | 0.72525 | 0.70496 | 0.68533 | 0.66634 |
7 | 0.75992 | 0.73483 | 0.71068 | 0.68744 | 0.66506 | 0.64351 | 0.62275 |
8 | 0.73069 | 0.70319 | 0.67684 | 0.65160 | 0.62741 | 0.60423 | 0.58201 |
9 | 0.70259 | 0.67290 | 0.64461 | 0.61763 | 0.59190 | 0.56735 | 0.54393 |
10 | 0.67556 | 0.64393 | 0.61391 | 0.58543 | 0.55839 | 0.53273 | 0.50835 |
11 | 0.64958 | 0.61620 | 0.58468 | 0.55491 | 0.52679 | 0.50021 | 0.47509 |
12 | 0.62460 | 0.58966 | 0.55684 | 0.52598 | 0.49697 | 0.46968 | 0.44401 |
13 | 0.60057 | 0.56427 | 0.53032 | 0.49856 | 0.46884 | 0.44102 | 0.41496 |
14 | 0.57748 | 0.53997 | 0.50507 | 0.47257 | 0.44230 | 0.41410 | 0.38782 |
15 | 0.55526 | 0.51672 | 0.48102 | 0.44793 | 0.41727 | 0.38883 | 0.36245 |
16 | 0.53391 | 0.49447 | 0.45811 | 0.42458 | 0.39365 | 0.36510 | 0.33873 |
17 | 0.51337 | 0.47318 | 0.43630 | 0.40245 | 0.37136 | 0.34281 | 0.31657 |
18 | 0.49363 | 0.45280 | 0.41552 | 0.38147 | 0.35034 | 0.32189 | 0.29586 |
19 | 0.47464 | 0.43330 | 0.39573 | 0.36158 | 0.33051 | 0.30224 | 0.27651 |
20 | 0.45639 | 0.41464 | 0.37689 | 0.34273 | 0.31180 | 0.28380 | 0.25842 |
21 | 0.43883 | 0.39679 | 0.35894 | 0.32486 | 0.29416 | 0.26648 | 0.24151 |
22 | 0.42196 | 0.37970 | 0.34185 | 0.30793 | 0.27751 | 0.25021 | 0.22571 |
23 | 0.40573 | 0.36335 | 0.32557 | 0.29187 | 0.26180 | 0.23494 | 0.21095 |
24 | 0.39012 | 0.34770 | 0.31007 | 0.27666 | 0.24698 | 0.22060 | 0.19715 |
25 | 0.37512 | 0.33273 | 0.29530 | 0.26223 | 0.23300 | 0.20714 | 0.18425 |
26 | 0.36069 | 0.31840 | 0.28124 | 0.24856 | 0.21981 | 0.19450 | 0.17220 |
27 | 0.34682 | 0.30469 | 0.26785 | 0.23560 | 0.20737 | 0.18263 | 0.16093 |
28 | 0.33348 | 0.29157 | 0.25509 | 0.22332 | 0.19563 | 0.17148 | 0.15040 |
29 | 0.32065 | 0.27902 | 0.24295 | 0.21168 | 0.18456 | 0.16101 | 0.14056 |
30 | 0.30832 | 0.26700 | 0.23138 | 0.20064 | 0.17411 | 0.15119 | 0.13137 |
31 | 0.29646 | 0.25550 | 0.22036 | 0.19018 | 0.16425 | 0.14196 | 0.12277 |
32 | 0.28506 | 0.24450 | 0.20987 | 0.18027 | 0.15496 | 0.13329 | 0.11474 |
33 | 0.27409 | 0.23397 | 0.19987 | 0.17087 | 0.14619 | 0.12516 | 0.10723 |
34 | 0.26355 | 0.22390 | 0.19035 | 0.16196 | 0.13791 | 0.11752 | 0.10022 |
35 | 0.25342 | 0.21425 | 0.18129 | 0.15352 | 0.13011 | 0.11035 | 0.09366 |
40 | 0.20829 | 0.17193 | 0.14205 | 0.11746 | 0.09722 | 0.08054 | 0.06678 |
45 | 0.17120 | 0.13796 | 0.11130 | 0.08988 | 0.07265 | 0.05879 | 0.04761 |
50 | 0.14071 | 0.11071 | 0.08720 | 0.06877 | 0.05429 | 0.04291 | 0.03395 |
Present Value of Ordinary Annuity of $1 per Period |
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Periods | 4.0% | 4.5% | 5% | 5.5% | 6% | 6.5% | 7% |
1 | 0.96154 | 0.95694 | 0.95238 | 0.94787 | 0.94340 | 0.93897 | 0.93458 |
2 | 1.88609 | 1.87267 | 1.85941 | 1.84632 | 1.83339 | 1.82063 | 1.80802 |
3 | 2.77509 | 2.74896 | 2.72325 | 2.69793 | 2.67301 | 2.64848 | 2.62432 |
4 | 3.62990 | 3.58753 | 3.54595 | 3.50515 | 3.46511 | 3.42580 | 3.38721 |
5 | 4.45182 | 4.38998 | 4.32948 | 4.27028 | 4.21236 | 4.15568 | 4.10020 |
6 | 5.24214 | 5.15787 | 5.07569 | 4.99553 | 4.91732 | 4.84101 | 4.76654 |
7 | 6.00205 | 5.89270 | 5.78637 | 5.68297 | 5.58238 | 5.48452 | 5.38929 |
8 | 6.73274 | 6.59589 | 6.46321 | 6.33457 | 6.20979 | 6.08875 | 5.97130 |
9 | 7.43533 | 7.26879 | 7.10782 | 6.95220 | 6.80169 | 6.65610 | 6.51523 |
10 | 8.11090 | 7.91272 | 7.72173 | 7.53763 | 7.36009 | 7.18883 | 7.02358 |
11 | 8.76048 | 8.52892 | 8.30641 | 8.09254 | 7.88687 | 7.68904 | 7.49867 |
12 | 9.38507 | 9.11858 | 8.86325 | 8.61852 | 8.38384 | 8.15873 | 7.94269 |
13 | 9.98565 | 9.68285 | 9.39357 | 9.11708 | 8.85268 | 8.59974 | 8.35765 |
14 | 10.56312 | 10.22283 | 9.89864 | 9.58965 | 9.29498 | 9.01384 | 8.74547 |
15 | 11.11839 | 10.73955 | 10.37966 | 10.03758 | 9.71225 | 9.40267 | 9.10791 |
16 | 11.65230 | 11.23402 | 10.83777 | 10.46216 | 10.10590 | 9.76776 | 9.44665 |
17 | 12.16567 | 11.70719 | 11.27407 | 10.86461 | 10.47726 | 10.11058 | 9.76322 |
18 | 12.65930 | 12.15999 | 11.68959 | 11.24607 | 10.82760 | 10.43247 | 10.05909 |
19 | 13.13394 | 12.59329 | 12.08532 | 11.60765 | 11.15812 | 10.73471 | 10.33560 |
20 | 13.59033 | 13.00794 | 12.46221 | 11.95038 | 11.46992 | 11.01851 | 10.59401 |
21 | 14.02916 | 13.40472 | 12.82115 | 12.27524 | 11.76408 | 11.28498 | 10.83553 |
22 | 14.45112 | 13.78442 | 13.16300 | 12.58317 | 12.04158 | 11.53520 | 11.06124 |
23 | 14.85684 | 14.14777 | 13.48857 | 12.87504 | 12.30338 | 11.77014 | 11.27219 |
24 | 15.24696 | 14.49548 | 13.79864 | 13.15170 | 12.55036 | 11.99074 | 11.46933 |
25 | 15.62208 | 14.82821 | 14.09394 | 13.41393 | 12.78336 | 12.19788 | 11.65358 |
26 | 15.98277 | 15.14661 | 14.37519 | 13.66250 | 13.00317 | 12.39237 | 11.82578 |
27 | 16.32959 | 15.45130 | 14.64303 | 13.89810 | 13.21053 | 12.57500 | 11.98671 |
28 | 16.66306 | 15.74287 | 14.89813 | 14.12142 | 13.40616 | 12.74648 | 12.13711 |
29 | 16.98371 | 16.02189 | 15.14107 | 14.33310 | 13.59072 | 12.90749 | 12.27767 |
30 | 17.29203 | 16.28889 | 15.37245 | 14.53375 | 13.76483 | 13.05868 | 12.40904 |
31 | 17.58849 | 16.54439 | 15.59281 | 14.72393 | 13.92909 | 13.20063 | 12.53181 |
32 | 17.87355 | 16.78889 | 15.80268 | 14.90420 | 14.08404 | 13.33393 | 12.64656 |
33 | 18.14765 | 17.02286 | 16.00255 | 15.07507 | 14.23023 | 13.45909 | 12.75379 |
34 | 18.41120 | 17.24676 | 16.19290 | 15.23703 | 14.36814 | 13.57661 | 12.85401 |
35 | 18.66461 | 17.46101 | 16.37419 | 15.39055 | 14.49825 | 13.68696 | 12.94767 |
40 | 19.79277 | 18.40158 | 17.15909 | 16.04612 | 15.04630 | 14.14553 | 13.33171 |
45 | 20.72004 | 19.15635 | 17.77407 | 16.54773 | 15.45583 | 14.48023 | 13.60552 |
50 | 21.48218 | 19.76201 | 18.25593 | 16.93152 | 15.76186 | 14.72452 | 13.80075 |
Chart of Accounts
CHART OF ACCOUNTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Merideth Industries Inc. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General Ledger | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Journal
1. and 2. Journalize the entries to record the transactions. Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.
PAGE 10
JOURNAL
DATE | DESCRIPTION | POST. REF. | DEBIT | CREDIT | |
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1 |
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2 |
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3 |
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4 |
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Final Questions
3. Determine the total interest expense for 2016.
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?
Yes
No
5. Compute the price of $31,339,478 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar.)
Present value of the face amount | |
Present value of the semiannual interest payments | |
Price received for the bonds |
1) | |||||||
Date | Account titles & Explanations | Debit | Credit | ||||
7/1/2016 | Cash | 31,339,478 | |||||
Discount on bonds payable | 4,060,522 | ||||||
Bonds payable | 35,400,000 | ||||||
2) | Date | Account titles & Explanations | Debit | Credit | |||
a) | 12/31/2016 | Interest expense | 1973026 | ||||
Discount on bonds payable(4060522/20) | 203026 | ||||||
Cash | (35,400,000*5%) | 1770000 | |||||
b) | 6/30/2017 | Interest expense | 1973026 | ||||
Discount on bonds payable(4060522/20) | 203026 | ||||||
Cash | (35,400,000*5%) | 1770000 | |||||
3) | total interest expense for 2016 | 1973026 | |||||
4) | Yes | ||||||
5) | Caluclation of bond issue price | ||||||
where i=6% | |||||||
t= 20 years | |||||||
for principal use PV of $1 table | |||||||
for interest use PV of ordinary annuity table | |||||||
Discount | |||||||
principal | * | factor | = | amount | |||
35400000 | * | 0.3118 | = | 11037720 | |||
interest | * | Factor | = | amount | |||
1770000 | * | 11.46992 | = | 20301758 | |||
Bond issue price | 31339478 | ||||||
present value of the face amount | 11037720 | ||||||
present value of the semi annual interest payments | 20301758 | ||||||
price received for bonds | 31339478 | ||||||