On July 1, 2014, Bryant Industries Inc. issued $100,000,000 of 20-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $91,420,905. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2015, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2014.
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. (Appendix 1) Compute the price of $91,420,905 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)
Answer:
1. Cash 91,420,905
Discount on Bonds Payable 8,579,095
Bonds Payable 100,000,000
2. a. Interest Expense 4,714,477
Discount on Bonds Payable* 214,477
Cash 4,500,000
* $8,579,095 ÷ 40 semiannual payments
b. Interest Expense 4,714,477
Discount on Bonds Payable* 214,477
Cash 4,500,000
* $8,579,095 ÷ 40 semiannual payments
3. $4,714,477
4. Yes. Investors will not be willing to pay the face amount of the bonds when the
interest payments they will receive from the bonds are less than the amount of
interest that they could receive from investing in other bonds.
5. Present value of $1 for 40 semiannual
periods at 5.0% semiannual rate………………………… 0.14205
Face amount of bonds………………………………………
Present value of annuity of $1 for 40
× $100,000,000 $14,205,000
semiannual periods at 5.0% semiannual rate………… 17.15909
Semiannual interest payment……………………………… × $ 4,500,000 77,215,905
Proceeds of bond issue…………………………………… $91,420,905
Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2015, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2014.
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. (Appendix 1) Compute the price of $91,420,905 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)
Answer:
1. Cash 91,420,905
Discount on Bonds Payable 8,579,095
Bonds Payable 100,000,000
2. a. Interest Expense 4,714,477
Discount on Bonds Payable* 214,477
Cash 4,500,000
* $8,579,095 ÷ 40 semiannual payments
b. Interest Expense 4,714,477
Discount on Bonds Payable* 214,477
Cash 4,500,000
* $8,579,095 ÷ 40 semiannual payments
3. $4,714,477
4. Yes. Investors will not be willing to pay the face amount of the bonds when the
interest payments they will receive from the bonds are less than the amount of
interest that they could receive from investing in other bonds.
5. Present value of $1 for 40 semiannual
periods at 5.0% semiannual rate………………………… 0.14205
Face amount of bonds………………………………………
Present value of annuity of $1 for 40
× $100,000,000 $14,205,000
semiannual periods at 5.0% semiannual rate………… 17.15909
Semiannual interest payment……………………………… × $ 4,500,000 77,215,905
Proceeds of bond issue…………………………………… $91,420,905
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