Question

Bond Premium, Entries for Bonds Payable Transactions

Rodgers Corporation produces and sells football equipment. On July 1, 20Y1, Rodgers issued $67,500,000 of 10-year, 11% bonds at a market (effective) interest rate of 10%, receiving cash of $71,706,030. 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
	Premium on Bonds Payable
	Bonds Payable

Feedback

Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.

2. Journalize the entries to record the following:

a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar.

	Interest Expense
	Premium on Bonds Payable
	Cash

Feedback

The straight-line method of amortization provides equal amounts of amortization over the life of the bond.

b. The interest payment on June 30, 20Y2, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar.

	Interest Expense
	Premium on Bonds Payable
	Cash

Feedback

The straight-line method of amortization provides equal amounts of amortization over the life of the bond.

3. Determine the total interest expense for 20Y1. 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?
Yes

5. Compute the price of $71,706,030 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 semi-annual interest payments
Price received for the bonds	$

Answer 1

	Date	Particular	Debit ($)	Credit($)
Solution 1	Jul-01	Cash A/C	71706030
		To bonds payable		67500000
		To premium on bonds payable		4206030
		( To record issue of bonds )
Solution 2	Dec-31	Interest expenses	3502198
		Premium on bond payable (4206030/20)	210302
		To Cash(67500000*11%*6/12)		3712500
		(To record semiannual interest
		payment and premium amortization )
	Jun-30	Interest expenses	3502198
		Premium on bond payable (4206030/20)	210302
		To Cash(67500000*11%*6/12)		3712500
		(To record semiannual interest
		payment and premium amortization )

Solution 3:

Total interest expense for 20Y1= $3502198

Solution 4: Yes , Bonds proceed is always greater than face amount when contract rate is greater than market rate of interest.

Solution 5:

Cash flow	table value	Amount	Present value
Present value of face amount	0.37689	67500000	25440075
present value of semiannual interest	12.46221	3712500	46265954.63
Price received for the bonds			71706029.63
n= 20	(10*2)
I = 5%	(10%*6/12)