Question

Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc. issued $84,100,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $94,580,761. 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 premium, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond premium, 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 greater than the face amount of the bonds when the contract rate is greater than the market rate of interest? 5. Compute the price of $94,580,761 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.

Answer 1

	Amount	Time	Bond of	issued Market/Effective	Received Cash
Bond issued	84100000	10 Year	12%	10%	94580761
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2016
Date	Account	Debit	Credit		Working
01-Jul-16	Cash	94580761
	Bond Payable		84100000
	Bond Premium		10480761		94580761-84100000
2a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the straight-line method.
Date	Account	Debit	Credit		Working
31-Dec-16	Interest Expense	4521962		Interest	(84100000*12%/2)-(10480761/20)
	Bond Premium	524038		Premium Amortization	10480761/20
	Cash		5046000		84100000*12%/2
2b.
Date	Account	Debit	Credit		Working
30-Jun-17	Interest Expense	4521962		Interest	(84100000*12%/2)-(10480761/20)
	Bond Premium	524038		Premium Amortization	10480761/20
	Cash		5046000		84100000*12%/2
3. Total Interest Expense for 2016
Interest	84100000*12%/2	5046000
Less: Premium Amortization	10480761/20	524038
Net Total Interest for 2016		4521962
4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest
Yes. As present Value of proceeds will always be greater
5. Compute the price of $94,580,761 received for the bonds by using the tables shown in Present Value Tables
N (10*2)	20
Coupons (1000*12%/2)	60
YTM (10%/2)	5%
		Year	PV at 5%	Coupon and Face value
Price	1124.62	1	0.952380952	60	57.14285714
		2	0.907029478	60	54.42176871
		3	0.863837599	60	51.83025591
		4	0.822702475	60	49.36214849
		5	0.783526166	60	47.01156999
		6	0.746215397	60	44.7729238
		7	0.71068133	60	42.64087981
		8	0.676839362	60	40.61036172
		9	0.644608916	60	38.67653497
		10	0.613913254	60	36.83479521
		11	0.584679289	60	35.08075735
		12	0.556837418	60	33.41024509
		13	0.530321351	60	31.81928104
		14	0.505067953	60	30.30407718
		15	0.481017098	60	28.86102589
		16	0.458111522	60	27.48669132
		17	0.436296688	60	26.17780126
		18	0.415520655	60	24.93123929
		19	0.395733957	60	23.74403742
		20	0.376889483	1060	399.5028518
					1124.622103