Question

Bond Discount, Entries for Bonds Payable Transactions

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $2,200,000 of 8-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $2,080,784. 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 $2,080,784 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

Answer:

Requirement 1: Account title and Explanation Debit Credit Cash $2,080,784 Discount on bonds payable $119,216 Bonds payable $2,200,000 [To record issuance of bonds at discount] Requirement 2: a. Interest payment on Dec 31, Year 1 [Using straight-line] Account title and Explanation Debit Credit Interest expense $160,451 Discount on bonds payable ($119,216/16 payments] $7,451 Cash ($2,200,000 x 9% < (6/12)] $99,000 [To record interest expense] b. Interest payment on June 30, Year 2 [Using straight-line] Account title and Explanation Debit Credit Interest expense $160,451 Discount on bonds payable ($119,216/16 payments] $7,451 Cash [$2,200,000 x 9% < (6/12)] $99,000 [To record interest expense]

Requirement 3: Total interest expense for Year 1 is $160,451 Requirement 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. A bond will always be sold at less than face value or stated rate when the market is lower. Requirement 5: Present value of the face amount $1,007,820 [$2,200,000 x 0.4581 present value factor (5%, 16 years)] Present value of the semi-annual interest payments $1,072,940 [$99,000 x 10.83777 present value annuity factor (5%, 16 years)] Price received for the bonds $2,080,760