Question
In: Accounting
On July 1, 2016, Merideth Industries Inc. issued $43,200,000 of 10-year, 11% bonds at a market...
On July 1, 2016, Merideth Industries Inc. issued $43,200,000 of 10-year, 11% bonds at a market (effective) interest rate of 12%, receiving cash of $40,722,290. 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:* a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) 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 $40,722,290 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar.) *Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.
Solutions
Expert Solution
| Date | Cash | Interest | Discount | Unamortized | Carrying | |||||
| Interest | Expense | Amortized | Discount | value of Bonds | ||||||
| Dec 31 2016 | 2376000 | 2443337 | 67337 | 2410373 | 40789627 | |||||
| June30 2016 | 2376000 | 2447378 | 71378 | 2338995 | 40861005 | |||||
| Journal Entry: | ||||||||||
| Julu 1 2016 | Cash Account Dr. | 40,722,290 | ||||||||
| Discount on Bonds payable Dr. | 2,477,710 | |||||||||
| Bonds payable | 43,200,000 | |||||||||
| Dec 31 2016 | Interest expense Dr. | 2,443,337 | ||||||||
| cash Account | 2,376,000 | |||||||||
| Discount on bonds payable | 67,337 | |||||||||
| June 30 2017 | Interest expense Dr. | 2447378 | ||||||||
| cash Account | 2376000 | |||||||||
| Discount on bonds payable | 71378 | |||||||||
| When the stated rate of interest is lower than market yield rate, then the bonds will always be issued at discount. | ||||||||||
| This is due to the fact that investor demand the lower price in sacrifice of interest income foregone by them. | ||||||||||
| PRICE OF BONDS | ||||||||||
| Present value of Interest payments made for 20 periods at 6% ($2376,000*Annuity factor i.e. 11.4699) | 27252482.4 | |||||||||
| Present value of maturity amount received after 10 years ($ 43200,000*PVF i.e.0.3118) | 13469760 | |||||||||
| ISSUE PRICE | 40,722,242 | |||||||||
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