Homework Answers
Answer 1. The entry to record the amount of cash proceeds from the issuance of the bonds: -
| Cash | 27,537,998 | |
| Premium on Bonds Payable | 1,437,998 | |
| Bonds Payable | 26,100,000 |
Answer 2:
a. The entry to record the first semiannual interest payment on December 31, 20Y1
| Interest Expense | 1,755,100 | |
| Premium on Bonds Payable ($1,437,998 / 20 semiannual period) | 71,900 | |
| Cash ($26,100,000 * 14 % * 6/12) | 1,827,000 |
b. The entry to record the first semiannual interest payment on June 30, 20Y1
| Interest Expense | 1,755,100 | |
| Premium on Bonds Payable | 71,900 | |
| Cash | 1,827,000 |
Answer 3. Total interest expense for 20Y1 = $1,755,100.
Explanation:
The total interest expense for 20Y1 is the interest expense recorded on December 31, 20Y1 ie. $1,755,100
Answer 4. Yes.
Explanation:
The market interest rate is the rate which investors / bondholders desire to get the return or interest on their investment on bonds. Contract rate is the rate at which the bond issuer pays to the bondholders. If contract rate is more than the market interest rate, it means that the the bondholders are getting more interest than they desire or expects. In such a case, from issuing such bonds the issuer will get the bond proceeds more than the face value.
Answer 5.
|
Present value of the face amount ($26,100,000 * PVIF 6.5%, 20 yrs) = ($26,100,000 * 0.28380) |
$7,407,180 |
| Present value of semiannual interest payment ($1,827,000 *PVIFA 6.5%, 20 yrs) = ($1,827,000 * 11.01851) | 20,130,818 |
| Present value of the bonds | $27,537,998 |
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