Question

On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $6,600,000 of 10-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $6,188,747. 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 $6,188,747 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

1)	Date	Account titles & Explanations				Debit	Credit
	1-Jul	Cash				6,188,747
		Discount on bonds				411,253
		bonds payable					6,600,000
2)	31-Dec	interest expense				317563
		discount on bonds		(411253/20)			20563
		cash	(6,600,000*4.5%)				297000
3)	30-Jun	interest expense				317563
		discount on bonds					20563
		cash					297000
4)		Yes
5)
		Principal				6,600,000
		interest				297000
		Calculation of bond issue price
		Where
		i=	5.00%
		t=	20 years
		principal		*	PV of $1 at 5% for 16 yrs =
		6,600,000		*	0.37689		=	2487474
		interest		*	PV of ordinary annuity at 5%=
		297000		*	12.46221		=	3701276
		bond issue price						6188750
		so
		present value of the face amount						2487474
		present value of the semi-annual interest payments						3701276
		price received for bonds						6188750	answer
		(slight difference is possible ,kindly use PV table as given in ur question)