Bond Discount, Entries for Bonds Payable Transactions On July 1, 2014, Brower In
ID: 2470248 • Letter: B
Question
Bond Discount, Entries for Bonds Payable Transactions
On July 1, 2014, Brower Industries Inc. issued $8,600,000 of 10-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $8,086,135. 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, 2014. 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.
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. 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?
SelectYesNo
5. Compute the price of $8,086,135 received for the bonds by using Table 1 and Table 2. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014. For a compound transaction, if an amount box does not require an entry, leave it blank.
Explanation / Answer
$8,600,000-$8,086,135 = $513,865 bond discount
513,865/20 = 25,693 semi-annual bond discount amortization
(8,600,000*11%)/2 =$473,000 semi-annual cash interest payment
$473,000+$25,693 = $498,693 semi-annual interest expense
Dr Interest Expense 498,693
Cr Cash 473,000
Cr Discount on Bonds Payable25,693
. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
Dr Interest Expense 447,307
Cr discount on bonds 25,693
Cr Cash 473,000
b. The interest payment on June 30, 2015, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
Same as above:
Dr Interest Expense 447,307
Cr discount on bonds 25,693
Cr Cash 473,000
Determine the total interest expense for 2014. Round to the nearest dollar
$447,307
.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
When the contract rate is greater than the market rate, the net present value of the future cash flows will be greater.
Compute the price of $8,086,135 received for the bonds by using Table 1 and Table 2. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences
Find the present value of the face value ($8,000,000) of the bonds discounted back 20 periods at the market rate of 5.5% per period =
The present value of the cash payments ($473,000) discounted back 20 periods at the market rate of 5.5% per period =
$2,741,831.71