Bond discount, entries for bonds payable transactions On July 1, 2016, Livingsto
ID: 2473135 • Letter: B
Question
Bond discount, entries for bonds payable transactions On July 1, 2016, 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 Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2016. Journalize the entries to record the following: The first semiannual interest payment on December 31, 2016, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) The interest payment on June 30, 2017, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) Determine the total interest expense for 2016. 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? (Appendix 1) Computer 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.)Explanation / Answer
Journal Entries for Issuance of Bonds at discount
On JUN 30, 2016
Cash Dr 42,309,236.00
discount on Bonds payable Dr 3,690,764.00
Bonds Payable Cr 46,000,000.00
On DEC 31, 2016
Interest Expense Dr 2,669,076.00
Discount on Bonds payable Cr 369,076.00
Cash Cr 2,300,000.00
On JUN 30, 2017
Interest Expense Dr 2,669,076.00
Discount on Bonds payable Cr 369,076.00
Cash Cr 2,300,000.00
TOTAL INTEREST EXPENSE FOR YEAR 2016 IS 2,669,076.00
Yes, when the contrat rate is less than the market rate bonds proceeds will be probably sells at discounted rate and will be lower than the face value.