Bond Discount, Entries for Bonds Payable Transactions On July 1 Year 1 Livingsto
ID: 2412402 • Letter: B
Question
Bond Discount, Entries for Bonds Payable Transactions On July 1 Year 1 Livingston Corporation, a wholesaler of manufacturing equipment, issued $8,700,000 of 10-year, 10% bonds at a market effective interest rate of 12%, receiving cash of $7,702,117 Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year Required: 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1. For a compound transaction, if an amount box does not require an entry, leave it blank. 2. Journalize the entries to record the following: For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answer to the nearest dollar a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method. b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. Round your answer to the nearest dollar 3. Determine the total interest expense for Year 1. Round to the nearest dollar 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. Compute the price of $7,702,117 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 bondsExplanation / Answer
Answer 1 Journal entry to record the amount of cash proceeds from issuance of the bonds on July 1,Year 1 Account Titles Debit Credit Cash 7702117 Discount of bonds payable 997883 Bonds Payable 8700000 Answer 2-a Journal entry for first semiannual interest payment on December 31,Year 1 Account Titles Debit Credit Interest Expense 484894 Discount of bonds payable 49894 Cash 435000 Answer 2-b Journal entry for first semiannual interest payment on June 30,Year 2 Account Titles Debit Credit Interest Expense 484894 Discount of bonds payable 49894 Cash 435000 Answer 3 Total Interest expense for Year 1 = $4,84,894 Answer 4 Yes , the bond proceeds will always be less than the amount og bonds when the contract rate is less than the market rate of interest. Answer 5 Computation of the price of $77,02,117 received for bonds Present value of the face amount = Face amount * discount factor @ 6% at the end of 20th semi annual period = $87,00,000 * (1/1.06^20) = $2,712,701 Present value of semi annual interest payment = Semi annual interest payment * Annuity factor @ 6% for 20 semi annual periods = $435000 * 11.46992 = $4,989,415 Price received for the bonds $7,702,116 Working Annuity factor @ 6% for 20 semi annual periods = [1-(1+r)^-n]/r r = rate of interest per semi annual period = 12%/2 = 6% n = no.of semi annual periods = 20 Annuity factor @ 6% for 20 semi annual periods = [1-(1+0.06)^-20]/0.06 = 11.46992