Question

Bond Premium, Entries for Bonds Payable Transactions Rodgers Corporation produces and sells football equipment. On July 1, 2041, Rodgers issued $70,600,000 of 10-year, 14% bonds at a market (effective) interest rate of 125, receiving cash of 578,697,425. 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. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2011 Cash Premium on Bonds Payable Bonds Payable Bonds Payab l ways recorded at face value. Any difference in se 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 premium, using the straight-line method. Round to the nearest dollar. Premium on Bonds Payable Cash

Answer 1

Number of periods = 10*2 = 20 Coupon rate = 14%/2 =7% Market interest rate = 12%/2 = 6% Date July 1, 2041 1) Account Titles and Explanation Cash Premium on Bonds payable ($78,697,425-$70,600,000) Bonds payable (To record the issuance of bonds) Debit | Credit $ 78,697,425 $ 8,097,425 $ 70,600,000 2a December 31, 20Y1 $ 4,537,129 $ 404,871 Interest expense Premium on Bonds payable ($8,097,425/20) Cash ($70,600,000*7%) (To record the first semi-annual interest payment) $ 4,942,000 2b) June 30, 20Y2 $ 4,537,129 $ 404,871 Interest expense Premium on Bonds payable ($8,097,425/20) Cash ($70,600,000*7%) (To record the first semi-annual interest payment) $ 4,942,000 3) Total interest expense for 20Y1 = $4,537,129 4) Yes If contract rate < Market rate of return, bonds are issued at discount. If contract rate = Market rate of return, bonds are issued at face value. If contract rate > Market rate of return, bonds are issued at premium.

5) Present value of the face amount = $70,600,000*PVF(n=20,i=6%) = $70,600,000* 0.31180 = $22,013,080 Present value of the semi-annual interest payments = $4,942,000*PVAF(n=20,i=6%) = $4,942,000*11.46992 = $56,684,345 Present value of the face amount $ 22,013,080 Add: Present value of the semi-annual interest payments $ 56,684,345 Price received for the bonds $ 78,697,425