Question

Bond Discount, Entries for Bonds Payable Transactions On July 1, 2041, Livingston Corporation, a wholesaler of manufacturing equipment, issued $4,000,000 of 6-year, 11% bonds at a market (effective) interest rate of 12%, receiving cash of $3,832,325. 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, if an amount box does not require an entry, leave it blank. 1. Joumalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 20Y1. Cash Discount on Bonds Payable Bonds Payable Foca Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account. 2. Journalize the entries to record the following: The first semiannual interest payment on December 31, 2011, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar Discount on Bonds Payable C

Answer 1

Requirement 1:

Account title and Explanation	Debit	Credit
Cash	$3,832,325
Discount on bonds payable	$167,675
Bonds payable		$4,000,000
[To record issuance of bonds at discount]

Requirement 2:

a. Interest payment on Dec 31,20Y1 [Using straight-line]

Account title and Explanation	Debit	Credit
Interest expense	$233,973
Discount on bonds payable [$167,675/12 payments]		$13,973
Cash [$4,000,000 x 11% x (6/12)]		$220,000
[To record interest expense]

b. Interest payment on June 30, 20Y2 [Using straight-line]

Account title and Explanation	Debit	Credit
Interest expense	$233,973
Discount on bonds payable [$167,675/12 payments]		$13,973
Cash [$4,000,000 x 11% x (6/12)]		$220,000
[To record interest expense]

Requirement 3:

Total interest expense for 20Y1 is $13,973

Requirement 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?

Yes.

Requirement 5:

Present value of the face amount	$1,987,880
[$4,000,000 x 0.49697 present value factor (6%, 12 years)]
Present value of the semi-annual interest payments	$1,844,445
[$220,000 x 8.38384 present value annuity factor (6%, 12 years)]
Price received for the bonds	$3,832,325