Question

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $7,400,000 of 9-year, 8% bonds at a market (effective) interest rate of 10%, receiving cash of $6,534,971. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Required: 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1. For a compound transaction, if an amount box does not require an entry, leave it blank. 2. Journalize the entries to record the following: For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answer to the nearest dollar. a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method. b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. 3. Determine the total interest expense for Year 1. 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? 5. Compute the price of $6,534,971 received for the bonds by using Table 1, Table 2, Table 3 and Table 4. (Round 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)

Cash	$6534971
Discount on bonds payable (7400000-6534971)	$865029
Bonds payable		$7400000
(To record bonds issued)

2-a)

Interest expense (296000+48057)	$344057
Discount on bonds payable (865029/18)		$48057
Cash (7400000*8%*6/12)		$296000
(To record interest payment and amortization of discount)

b)

Interest expense (296000+48057)	$344057
Discount on bonds payable (865029/18)		$48057
Cash (7400000*8%*6/12)		$296000
(To record interest payment and amortization of discount)

3) Total interest expense for Year 1= $344057

4) Yes, the bonds proceed will always be less than the face amount of the bonds when the contract rate is less than the market interest. As when the contract rate is less than the market rate that means the bonds are issuing at discount by which the bonds proceed will always be less than the face amount of the bonds.

5) Interest expense= $7400000*8%*6/12= $296000

Present value of the face amount (7400000*0.41552)	$3074848
Present value of the semiannual interest payments (296000*11.68959)	3460119
Price received for the bonds	$6534967