Question

Rodgers Corporation produces and sells football equipment. On July 1, Year 1, Rodgers Corporation issued $43,200,000 of 10-year, 14% bonds at a market (effective) interest rate of 12%, receiving cash of $48,154,798. 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 with a compound transaction, 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, Year 1.

	Cash
	Premium on Bonds Payable
	Bonds Payable

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar.

	Interest Expense
	Premium on Bonds Payable
	Cash

b. The interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar.

	Interest Expense
	Premium on Bonds Payable
	Cash

3. Determine the total interest expense for Year 1. Round to the nearest dollar.
$

4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest?

5. Compute the price of $48,154,798 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

Face Value of Bonds = $43,200,000
Issue Value of Bonds = $48,154,798

Premium on Bonds = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds = $48,154,798 - $43,200,000
Premium on Bonds = $4,954,798

Annual Coupon Rate = 14%
Semiannual Coupon Rate = 7%
Semiannual Coupon = 7% * $43,200,000
Semiannual Coupon = $3,024,000

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Premium = Premium on Bonds / Semiannual Period
Semiannual Amortization of Premium = $4,954,798 / 20
Semiannual Amortization of Premium = $247,740

Semiannual Interest Expense = Semiannual Coupon - Semiannual Amortization of Premium
Semiannual Interest Expense = $3,024,000 - $247,740
Semiannual Interest Expense = $2,776,260

Answer 1 and 2.

Credit Date July 1, Year 1 Debit 48,154,798 4,954,798 43,200,000 Dec. 31, Year 1 General Journal Cash Premium on Bonds Payable Bonds Payable Interest Expense Premium on Bonds Payable Cash Interest Expense Premium on Bonds Payable Cash 2,776,260 247,740 3,024,000 June 30, Year 2 2,776,260 247,740 3,024,000

Answer 3.

Interest Expense for Year 1 = $2,776,260

Answer 4.

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

Answer 5.

Annual Interest Rate = 12.00%
Semiannual Interest Rate = 6.00%

Present Value of Face Amount = $43,200,000 * PV of $1 (6.00%, 20)
Present Value of Face Amount = $43,200,000 * 0.31180
Present Value of Face Amount = $13,469,760

Present Value of Semiannual Interest Payments = $3,024,000 * PVA of $1 (6.00%, 20)
Present Value of Semiannual Interest Payments = $3,024,000 * 11.46992
Present Value of Semiannual Interest Payments = $34,685,038

Price Received for the Bonds = Present Value of Face Amount + Present Value of Semiannual Interest Payments
Price Received for the Bonds = $13,469,760 + $34,685,038
Price Received for the Bonds = $48,154,798