Question

Bond Discount, Entries for Bonds Payable Transactions

On July 1, 20Y1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $7,900,000 of 5-year, 8% bonds at a market (effective) interest rate of 10%, receiving cash of $7,289,956. 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

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 discount, using the straight-line method. Round to the nearest dollar.

	Interest Expense
	Discount 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 discount, using the straight-line method. Round to the nearest dollar.

	Interest Expense
	Discount 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 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 $7,289,956 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

Solution 1:
Journal Entries - Livingston Corporation
Event	Particulars	Debit	Credit
1	Cash Dr	$7,289,956.00
	Discount on bond payable	$610,044.00
	To Bond Payable		$7,900,000.00
	(To record issue of bonds)

Solution 2:
Journal Entries - Livingston Corporation
Event	Particulars	Debit	Credit
a	Interest expense Dr	$377,004.00
	To Cash ($7,900,000*8%*6/12)		$316,000.00
	To Discount on bond payable ($610,044/10)		$61,004.00
	(To record semiannual interest payment and discount amortization)
b	Interest expense Dr	$377,004.00
	To Cash ($7,900,000*8%*6/12)		$316,000.00
	To Discount on bond payable ($610,044/10)		$92,269.00
	(To record semiannual interest payment and discount amortization)

Solution 3: Interest expense for 20Y1 = $377,004 Solution 4: Yes, bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest

Solution 5:
Computation of bond price
Table values are based on:
n=	10
i=	5.00%
Cash flow	Table Value	Amount	Present Value
Present value of face amount	0.61391	$7,900,000.00	$4,849,889
Present value of semiannual interest	7.72173	$316,000.00	$2,440,067
Price received for the bonds			$7,289,956