Question

Rodgers Corporation produces and sells football equipment. On July 1, Year 1, Rodgers Corporation issued $70,200,000 of 10-year, 11% bonds at a market (effective) interest rate of 10%, receiving cash of $74,574,271. 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 with a compound transaction, if an amount box does not require an entry, leave it blank. 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1. 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 premium, using the straight-line method. Round to the nearest dollar. b. The interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method. Round 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 greater than the face amount of the bonds when the contract rate is greater than the market rate of interest?

Answer 1

Solution 1:

Journal Entries - Rodgers Corporation
Date	Particulars	Debit	Credit
1-Jul-20Y1	Cash Dr	$74,574,271.00
	To Bond Payable		$70,200,000.00
	To Premium on Bond Payable		$4,374,271.00
	(To record issue of bonds)

Solution 2:

Journal Entries - Rodgers Corporation
Event	Particulars	Debit	Credit
31-Dec-20Y1	Interest expense Dr	$3,642,286.00
	Preimum on bond payable Dr ($4,374,271 / 20)	$218,714.00
	To Cash ($70,200,000*11%*6/12)		$3,861,000.00
	(To record semiannual interest payment and Premium amortization)
30-Jun-20Y2	Interest expense Dr	$3,642,286.00
	Preimum on bond payable Dr ($4,374,271 / 20)	$218,714.00
	To Cash ($70,200,000*11%*6/12)		$3,861,000.00
	(To record semiannual interest payment and Premium amortization)

Solution 3:

Total interest expense for 20Y1 = $3,642,286

Solution 4:

Yes, bonds proceed always greater than face amount when contract rate is greater than market rate of interest.

Solution 5:

Computation of bond price
Table values are based on:
n=	20
i=	5.00%
Cash flow	Table Value	Amount	Present Value
Present value of face amount	0.37689	$70,200,000.00	$26,457,678
Present value of semiannual interest	12.46221	$3,861,000.00	$48,116,593
Price received for the bonds			$74,574,271