Question 1

Bond discount, entries for bonds payable transactions

On July 1, 20Y1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $8,700,000 of 5-year, 9% bonds at a market (effective) interest rate of 11%, receiving cash of $8,044,223. 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, if an amount box does not require an entry, leave it blank.

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1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 20Y1.

Date	Account	Debit	Credit
20Y1 July 1	Accounts Payable Bonds PayableCashInterest Expense Premium on Bonds Payable	- Select -	- Select -
	Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -
	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -

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2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.

Date	Account	Debit	Credit
20Y1 Dec. 31	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest Payable	- Select -	- Select -
	Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpenseInterest Payable	- Select -	- Select -
	Accounts PayableBonds PayableCashInterest ExpenseInterest Payable	- Select -	- Select -

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b. The interest payment on June 30, 20Y2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.

Date	Account	Debit	Credit
20Y2 June 30	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest Payable	- Select -	- Select -
	Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpenseInterest Payable	- Select -	- Select -
	Accounts PayableBonds PayableCashInterest ExpenseInterest Payable	- Select -	- Select -

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3. Determine the total interest expense for 20Y1. Round to the nearest dollar. fill in the blank 1 of 1$

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?

YesNo

5. Compute the price of $8,044,223 received for the bonds by using the Present value at compound interest, and Present value of an annuity. Round your PV values to 5 decimal places and the final answers to the nearest dollar. Your total may vary slightly from the price given due to rounding differences.

Line-Item Description	Price
Present value of the face amount	fills in the blank 1 of 3$
Present value of the semiannual interest payments	fill in the blank 2 of 3
Proceeds of bond issue	fill in the blank 3 of 3$

Bond premium, entries for bonds payable transactions

Rodgers Corporation produces and sells football equipment. On July 1, 20Y1, Rodgers 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, if an amount box does not require an entry, leave it blank.

Question Content Area

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 20Y1.

Date	Account	Debit	Credit
20Y1 July 1	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -
	Accounts PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -
	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest Expense	- Select -	- Select -

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2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar.

Date	Account	Debit	Credit
20Y1 Dec. 31	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest Payable	- Select -	- Select -
	Accounts PayableBonds PayableCashDiscount on Bonds PayablePremium on Bonds Payable	- Select -	- Select -
	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -

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b. The interest payment on June 30, 20Y2, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar.

Date	Account	Debit	Credit
20Y2 June 30	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest Payable	- Select -	- Select -
	Accounts PayableBonds PayableCashDiscount on Bonds PayablePremium on Bonds Payable	- Select -	- Select -
	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -

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3. Determine the total interest expense for 20Y1. Round to the nearest dollar. fill in the blank 1 of 1

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?

YesNo

5. Compute the price of $73,100,469 received for the bonds by using the Present value at compound interest, and Present value of an annuity. Round your PV values to 5 decimal places and the final answers to the nearest dollar.

Line Item Description	Price
Present value of the face amount	fill in the blank 1 of 3$
Present value of the semi-annual interest payments	fill in the blank 2 of 3
Proceeds of bond issue	fill in the blank 3 of 3$

Amortize premium by interest method

Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Shunda issued $20,000,000 of 5-year, 10% bonds at a market (effective) interest rate of 8%, receiving cash of $21,622,179. Interest is payable semiannually. Shundas fiscal year begins on January 1. The company uses the interest method.

a. Journalize the entries to record the following:

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1. Sale of the bonds. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

blank	Account	Debit	Credit
blank	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds PayableCash	Cash	Cash
	Accounts PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds PayablePremium on Bonds Payable	Premium on Bonds Payable	Premium on Bonds Payable
	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest ExpenseBonds Payable	Bonds Payable	Bonds Payable

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Feedback

Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.

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2. First semiannual interest payment, including amortization of premium. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

blank	Account	Debit	Credit
blank	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest PayableInterest Expense	Interest Expense	Interest Expense
	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest PayablePremium on Bonds PayablePremium on Bonds Payable	Premium on Bonds Payable	Premium on Bonds Payable
	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds PayableCash	Cash	Cash

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Feedback

As the discount or premium is amortized, the carrying amount of the bond changes. As a result, interest expense also changes each period.

Compare the rate on the bonds and the market rate.

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3. Second semiannual interest payment, including amortization of premium. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

blank	Account	Debit	Credit
blank	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest PayableInterest ExpenseInterest Expense	Interest Expense	Interest Expense
	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest PayablePremium on Bonds PayablePremium on Bonds Payable	Premium on Bonds Payable	Premium on Bonds Payable
	Bonds PayableCashDiscount on Bonds PayableInterest PayableInterest ExpensePremium on Bonds PayableCash	Cash	Cash

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Feedback

As the discount or premium is amortized, the carrying amount of the bond changes. As a result, interest expense also changes each period.

Compare the rate on the bonds and the market rate.

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b. Determine the bond interest expense for the first year. Round to the nearest dollar.

Line Item Description	Bond Interest Expense
Annual interest paid	fill in the blank 1 of 3$
Less premium amortized	fill in the blank 2 of 3
Interest expense for first year	fill in the blank 3 of 3$

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Feedback

To find the interest expense either add any discount amortized or subtract any premium amortized to cash paid to the bondholders.

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c. Explain why the company was able to issue the bonds for $21,622,179 rather than for the face amount of $20,000,000. The bonds sell for more than their face amount because the market rate of interest is fill in the blank 1 of 2

greater thanless thanthe same asless than

the contract rate of interest. Investors fill in the blank 2 of 2

areare notare

willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate).