Question

Bond Discount, Entries for Bonds Payable Transactions On July 1, 20Y1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $6,900,000 of 5-year, 9% bonds at a market (effective) interest rate of 11%, receiving cash of $6,379,901. 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, 20Y1. 2. Journalize the entries to record the following : a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar. b. The interest payment on June 30, 20Y2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.
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Answer 1

Face Value of Bonds = $6,900,000
Issue Value of Bonds = $6,379,901

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $6,900,000 - $6,379,901
Discount on Bonds = $520,099

Annual Coupon Rate = 9.00%
Semiannual Coupon Rate = 4.50%
Semiannual Coupon = 4.50% * $6,900,000
Semiannual Coupon = $310,500

Time to Maturity = 5 years
Semiannual Period = 10

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period
Semiannual Amortization of Discount = $520,099 / 10
Semiannual Amortization of Discount = $52,010

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $310,500 + $52,010
Semiannual Interest Expense = $362,510

Answer 1 and 2.

Credit Date July 1, 20Y1 Debit 6,379,901 520,099 6,900,000 Dec. 31, 2041 362,510 General Journal Cash Discount on Bonds Payable Bonds Payable Interest Expense Discount on Bonds Payable Cash Interest Expense Discount on Bonds Payable Cash 52,010 310,500 June 30, 20Y2 362,510 52,010 310,500

Answer 3.

Interest Expense for Year 1 = $362,510

Answer 4.

Yes. Proceed from issue of bonds will always be less than the face amount when the contract rate is less than the market rate of interest.

Answer 5.

Annual Interest Rate = 11%
Semiannual Interest Rate = 5.50%

Present Value of Face Amount = $6,900,000 * PV of $1 (5.50%, 10)
Present Value of Face Amount = $6,900,000 * 0.58543
Present Value of Face Amount = $4,039,467

Present Value of Semiannual Interest Payments = $310,500 * PVA of $1 (5.50%, 10)
Present Value of Semiannual Interest Payments = $310,500 * 7.53763
Present Value of Semiannual Interest Payments = $2,340,434

Price Received for the Bonds = Present Value of Face Amount + Present Value of Semiannual Interest Payments
Price Received for the Bonds = $4,039,467 + $2,340,434
Price Received for the Bonds = $6,379,901