Question

Part 1

As a result of the long-range strategic budgeting process that took place during the end of 2018, Lynbrook, Inc. decided to issue $5,000,000 of 8%, 15-year bonds on January 1, 2019. The bonds will pay interest semiannually on June 30 and December 31. Due to current conditions in the bond market, the market interest rate is 6%.

Required

1. Determine the issue price of the bonds (Market Value) on January 1, 2019. Once the issue price is determined, prepare the January 1, 2019, journal entry to record the bonds' issuance.

2. Prepare the journal entries to record the first two interest payments, using the straight-line method to amortize any discount or premium.

3. Determine the total bond interest expense to be recognized over the bonds' life.

Part 2

The long-range strategic budgeting process also called for Lynbrook to borrow $4,000,000 cash on January 1, 2019 from JP Morgan Chase, by signing a signing a five-year 8% installment note. The note requires equal payments of principal and interest on December 31 each year, in the amount of $1,001,826.

Required

1. Prepare the journal entries required by Lynbrook on the following dates: a) December 31, 2019

   b) December 31, 2020

2. Determine the total interest expense Lynbrook will recognize over the life of the note.

Answer 1

x fc PART 1 A B H PART 1 face value of bonds semiannual coupon rate semiannual coupon payment semiannual market rate semiannual interest periods the issue price of the bonds (Market Value) on January 1, 2019 $5,000,000 4.00% $ 200,000 3.00% $ 30 $5,980,022 the January 1, 2019, journal entry to record the bonds' issuance account titles and explanation debit date credit January 1, 2019 $5,980,022 cash bonds payable premium on bonds payable (issue of bonds recorded) $5,000,000 $ 980,022 total premium on bonds payable semiannual interest periods semiannual premium amortization $ 980,022 30 $32,667

- X fic date C23 ДА В Ε F G H 21 the journal entries to record the first two interest payments account titles and explanation debit date credit June 30, 2019 $ 167,333 $ 32,667 interest expense premium on bonds payable cash (interest expense recorded) $ 200,000 $ 167,333 $ 32,667 December 31, 2019 interest expense premium on bonds payable cash (interest expense recorded) $ 200,000 total bond interest expense to be recognized over the bonds' life = $167,333 * 30 = $5,019,978

C38 X for PART 2 D E F G H. PART 2 date December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 December 31, 2023 total repayment $ 1,001,826 $ 1,001,826 $ 1,001,826 $ 1,001,826 $ 1,001,826 amortization schedule interest expense $ 320,000 $ 265,454 $ 206,544 $ 142,922 $ 74,210 principal repayment carrying value $ 681,826 | $3,318,174 $ 736,372 $ 2,581,802 $ 795,282 $ 1,786,520 $858,904 $927,616 $927,616 $0 no date account titles and explanation debit credit a) $ 681,826 $ 320,000 December 31, 2019 note payable interest expense cash (payment of installment recorded) $ 1,001,826 b) $ 736,372 $ 265,454 December 31, 2020 note payable interest expense cash (payment of installment recorded) $ 1,001,826 total interest expense Lynbrook will recognize over the life of the note = $ 1,009,130

for formulas and calculations, refer to the images below -

PART 1 E F G H PART 1 face value of bonds semiannual coupon rate semiannual coupon payment semiannual market rate semiannual interest periods 5000000 =8%/2 =E2*E3 =6%/2 |=15*2 the issue price of the bonds (Market Value) on January 1, 2019 --PV(E5,E6, E4,E2) the January 1, 2019, journal entry to record the bonds' issuance account titles and explanation debit date credit January 1, 2019 =E2 cash bonds payable premium on bonds payable (issue of bonds recorded) =E12-F13 -F14 total premium on bonds payable semiannual interest periods semiannual premium amortization =15*2 =E18/E19

1 x fc date the journal entries to record the first two interest payments account titles and explanation debit date credit June 30, 2019 =F27-E26 =E20 interest expense premium on bonds payable cash (interest expense recorded) =E25 =E26 December 31, 2019 interest expense premium on bonds payable cash (interest expense recorded) total bond interest expense to be recognized over the bonds' life = $167,333 * 30 = =E30*30

C38 x fc PART 2 1 B A C E F G H total repayment | PART 2 date December 31, 2019 1001826 December 31, 2020 1001826 December 31, 2021 1001826 December 31, 2022 1001826 December 31, 2023 1001826 amortization schedule interest expense principal repayment carrying value -4000000*8% =D40-E40 -4000000-F40 =G40*8% =D41-E41 =G40-F41 =G41*8% =D42-E42 =G41-F42 =G42*8% =D43-E43 =G42-F43 =G43*8%+1 =D44-E44 =G43-F44 no date account titles and explanation debit credit =F40 =E40 a) December 31, 2019 note payable interest expense cash (payment of installment recorded) =E48+E49 =F41 =E41 December 31, 2020 note payable interest expense cash (payment of installment recorded) =E53+E54 total interest expense Lynbrook will recognize over the life of the note = =SUM(E40:E44)

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