On July 1, 2014, Livingston Corporation, a wholesaler of manufacturing equipment, issued $46,000,000 of 20-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $42,309,236. 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 $42,309,236 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 42,309,236
Discount on Bonds Payable 3,690,764
Bonds Payable 46,000,000
2. a. Interest Expense 2,392,269
Discount on Bonds Payable* 92,269
Cash 2,300,000
*$3,690,764 ÷ 40 semiannual payments
b. Interest Expense 2,392,269
Discount on Bonds Payable* 92,269
Cash 2,300,000
*$3,690,764 ÷ 40 semiannual payments
3. $2,392,269
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 5.5% semiannual rate………………………………… 0.11746
Face amount of bonds……………………………………………
Present value of an annuity of $1
× $46,000,000 $ 5,403,160
for 40 semiannual periods at 5.5% semiannual rate……… 16.04612
Semiannual interest payment………………………………………× $ 2,300,000 36,906,076
Proceeds of bond issue…………………………………………… $42,309,236
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 $42,309,236 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 42,309,236
Discount on Bonds Payable 3,690,764
Bonds Payable 46,000,000
2. a. Interest Expense 2,392,269
Discount on Bonds Payable* 92,269
Cash 2,300,000
*$3,690,764 ÷ 40 semiannual payments
b. Interest Expense 2,392,269
Discount on Bonds Payable* 92,269
Cash 2,300,000
*$3,690,764 ÷ 40 semiannual payments
3. $2,392,269
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 5.5% semiannual rate………………………………… 0.11746
Face amount of bonds……………………………………………
Present value of an annuity of $1
× $46,000,000 $ 5,403,160
for 40 semiannual periods at 5.5% semiannual rate……… 16.04612
Semiannual interest payment………………………………………× $ 2,300,000 36,906,076
Proceeds of bond issue…………………………………………… $42,309,236
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