Question

Rodgers Corporation produces and sells football equipment. On July 1, Year 1, Rodgers Corporation issued $65,000,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $73,100,469. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Required: For all journal entries with a compound transaction, if an amount box does not require an entry, leave it blank.

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1. Cash 73,100,469 Premium on Bonds Payable 8,100,469 Bonds Payable 65,000,000 Feedback Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account. The straight-line method of amortization provides equal amounts of amortization over the life of the bond.

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar. Interest Expense 3,494,977 Premium on Bonds Payable 405,023 Cash 3,900,000 Feedback Correct

b. The interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar. Interest Expense 3,494,977 Premium on Bonds Payable 405,023 Cash 3,900,000 Feedback Correct

3. Determine the total interest expense for Year 1. Round to the nearest dollar. $ 3,494,977 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 5. Compute the price of $73,100,469 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

Face Value of Bonds = $65,000,000
Issue Value of Bonds = $73,100,469

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $73,100,469 - $65,000,000
Premium on Bonds = $8,100,469

Annual Coupon Rate = 12%
Semiannual Coupon Rate = 6%
Semiannual Coupon = 6% * $65,000,000
Semiannual Coupon = $3,900,000

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Premium = Premium on Bonds / Semiannual Period
Semiannual Amortization of Premium = $8,100,469 / 20
Semiannual Amortization of Premium = $405,023

Semiannual Interest Expense = Semiannual Coupon - Semiannual Amortization of Premium
Semiannual Interest Expense = $3,900,000 - $405,023
Semiannual Interest Expense = $3,494,977

Answer 1 and 2.

Answer 3.

Interest Expense for Year 1 = $3,494,977

Answer 4.

Yes. Proceed from issue of bonds will always be less than the face amount when the contract rate is less than the market rate of interest.

Answer 5.

Annual Interest Rate = 10%
Semiannual Interest Rate = 5%

Present Value of Face Amount = $65,000,000 * PV of $1 (5%, 20)
Present Value of Face Amount = $65,000,000 * 0.37689
Present Value of Face Amount = $24,497,850

Present Value of Semiannual Interest Payments = $3,900,000 * PVA of $1 (5%, 20)
Present Value of Semiannual Interest Payments = $3,900,000 * 12.46221
Present Value of Semiannual Interest Payments = $48,602,619

Price Received for the Bonds = Present Value of Face Amount + Present Value of Semiannual Interest Payments
Price Received for the Bonds = $24,497,850 + $48,602,619
Price Received for the Bonds = $73,100,469