Answer:
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.
Dr Cash 37,282,062
Dr Discount on bonds payable 2,717,938
Cr Bonds payable 40,000,000
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 discount, using the straight-line method. Round to the nearest dollar.
discount on bonds payable = 2,717,938 / 20 coupons = $135,896.90
December 31, Year 1, first coupon payment
Dr Interest expense 1,535,896.90
Cr Cash 1,400,000
Cr Discount on bonds payable 135,896.90
b. The interest payment on June 30, Year 2, and the amortization of the bond discount,using the straight-line method. Round to the nearest dollar.
June 30, Year 2, second coupon payment
Dr Interest expense 1,535,896.90
Cr Cash 1,400,000
Cr Discount on bonds payable 135,896.90
3. Determine the total interest expense for Year 1.
$1,535,896.90
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?
yes, if the market rate is higher than the coupon rate, the bonds will sell at a discount.
5. (Appendix 1) Compute the price of $37,282,062 received for the bonds by using the present value tables in Appendix A at the end of the text. Round to the nearest dollar.
bond price = PV of face value + PV of coupon payments
bond's market price = $18,256,000 + $19,026,000 = $37,282,000
1. July 1, Year 1:
Debit Cash $37,282,062
Debit Bonds Discounts $2,717,938
Credit Bonds Payable $40,000,000
2. a. December 31, Year 1:
Debit Interest Expense $1,535,897
Credit Discount Amortization $135,897
Credit Cash $1,400,000
b. June 30, Year 2:
Debit Interest Expense $1,535,897
Credit Discount Amortization $135,897
Credit Cash $1,400,000
3. The total interest expense for Year 1 is $1,535,897.
4. The bond proceeds will always be less than the face amount of the bonds when the contract or coupon interest rate is less than the market (effective) interest rate because the bonds are issued at a discount.
5. The present value price of the $37,282,062 received is computed as follows:
PV factor of 4% for 20 years = 0.4564
PV of face value = $18,256,000 ($40,000,000 x 0.4564)
PV annuity factor of 4% for 20 years = 13.59
PV of coupon interest payments = $19,026,000 ($1,400,000 x 13.59)
The bond's market price = $37,282,000 ($18,256,000 + $19,026,000)
Data and Calculations:
Face value of bonds = $40,000,000
Proceeds from bonds = $37,282,062
Discounts from bonds = $2,717,938 ($40,000,000 - $37,282,062)
Maturity period = 10 years (20 payments)
Coupon interest rate = 7%
Effective interest rate = 8%
Interest payment = semiannually
Interest payment date = December 31 and June 30
Straight-line amortization of discounts = $135,896.90 ($2,717,938/20)
December 31, Year 1:
Cash payment = $1,400,000 ($40,000,000 x 7% x 1/2)
Amortization of discount = $135,896.90
Interest Expense = $1,535,896.90
Carrying value of bond = $37,417,958.90 ($37,282,062 + $135,896.90)
June 30, Year 2:
Cash payment = $1,400,000 ($40,000,000 x 7% x 1/2)
Amortization of discount = $135,896.90
Interest Expense = $1,535,896.90
Carrying value of bond = $37,553,855.80 ($37,417,958.90 + $135,896.90)
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