Question

Bond Discount, Entries for Bonds Payable Transactions

On July 1, 20Y1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $4,400,000 of 8-year, 11% bonds at a market (effective) interest rate of 12%, receiving cash of $4,177,688. 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.

	Cash
	Discount on Bonds Payable
	Bonds Payable

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.

	Interest Expense
	Discount on Bonds Payable
	Cash

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.

	Interest Expense
	Discount on Bonds Payable
	Cash

3. Determine the total interest expense for 20Y1. Round to the nearest dollar.
$

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

5. Compute the price of $4,177,688 received for the bonds by using the present value tables in Appendix A. Round your PV values to 5 decimal places and the final answers to the nearest dollar. Your total may vary slightly from the price given due to rounding differences.

Present value of the face amount	$
Present value of the semiannual interest payments
Price received for the bonds	$

Answer 1

1)	Date	Account titles & Explanations				Debit	Credit
	1-Jul	Cash				4,177,688
		Discount on bonds				222,312
		bonds payable					4,400,000
2)	31-Dec	interest expense				255895
		discount on bonds		(222312/16)			13895
		cash	(4,400,000*5.5%)				242000
	30-Jun	interest expense				255895
		discount on bonds					13895
		cash					242000
3)		total interest expense for 20Y1				255895
4)		Yes
5)
		Principal				4,400,000
		interest				242000
		Calculation of bond issue price
		Where
		i=	6.00%
		t=	16
		principal		*	PV of $1 at 6% for 16 yrs =
		4,400,000		*	0.39365		=	1732060
		interest		*	PV of ordinary annuity at 6%=
		242000		*	10.1059		=	2445628
		bond issue price						4177688
		so
		present value of the face amount						1732060
		present value of the semi-annual interest payments						2445628
		price received for bonds						4177688	answer