Question

eBook On July 1, 2016, Merideth Industries Inc issued Sas,400,000 of 10-year, 10% bonds at a market (effective) interest rate of 12%, receiving cash of $31,339,478. 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, 2016. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar) b. The interest payment on June 30, 2017, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar) 3. Determine the total interest expense for 2016 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 $31,339,478 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar) Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

Solution 35,400,000 31,339,478 $4,060,522 Par Value of Bonds Issue price of Bonds Discount on issue of Bonds ($35,400,000- $31,339,478) Coupon Interest rate 10% Market effective interest rate 12% Bond duration 10 Years Interest payment frequency Semi-annual Total no. of interest payment till maturity (10Years x 2) 20 $1,770,000 Semi-annual interest payment $35,400,000 x 10% x 1/2- Required 1Journalize the entry to record the amount of cash proceeds from the issuance of the Account Titles and Date Debit Credit ion July 1, 2016 Cash Discount on Bonds Payable 31,339,478 060,522 Bonds Payable 5,400,000 35,400,000 35,400,000 31339,478) Total interest payment during the entire Bond life (51,770,000 x 20) Payment on maturity of Bonds Less: Issue price of Bond Total Interest expense to be recognised during the entire Bond life 522 Semi-Annual Interest Expense to be recognised ($39,460,522 /20) Semi-Annual Bond discount amortization ($1,973,026- $1,770,000) $1,973,026 $203,026 Account Titles and Explanation Debit Date Credit Dec. 31, 2016 Interest Expense 1,973,026 Discount on Bonds Payable $203,026 Cash 770 (bl The Interest payment on une 30, 2017, and the amortzation of the Bond discount, usine the Account Titles and Explanation Debit edit Date June 30, 2017 nterest Expense 1,973,026 Discount on Bonds Payable 203,026 Cash 1,770,000 uired 3 : Detetal interest $1,973,026 Total Interest Expense for 2016 Required 4 Will the bond proceeds aways be less than the face amount of the Bonds when the Yes, bond proceeds will always be less than the face amount of the Bonds when the contract rate is less than the market rate of interest, since the investor will not be willing to pay the face value as the investment in Bonds will not meet the expectaction of the investor in terms of market rate of return. Required 5 Compute the price of $31,339478 received for the bonds using the tables shown in Present value annuity factor @ 6% sem annual interest rate for 20 11.46992 semi-annual period $1,770,000o Semi-annual interest payment Present value of Semi-annual interest payment 20,301,758 Present value factor @ 6% semi annual interest rate for 20 semi- 0.311800 annual period 35,400,000 Payment at the Maturity of Bonds Present value of maturity payment Issue price of Bonds 1,037,720 31,339,478