Question

Bond Premium, Entries for Bonds Payable Transactions Rodgers Corporation produces and sells football equipment. On July 1, 20Y1, Rodgers issued $32,200,000 of 10-year, 13% bonds at a market (effective) interest rate of 12%, receiving cash of $34,046,503. 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. 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar. b. The interest payment on June 30, 20Y2, and the amortization of the bond premium, using the straight-line method. Round to the nearest dollar.
...............

Answer 1

Number of periods = 10*2 = 20 Coupon rate = 13%/2 = 6.5% Market interest rate = 12%/2 = 6% Credit Date 1) July 1, 20Y1 Debit $ 34,046,503 Account Titles and Explanation Cash Premium on Bonds payable ($34,046,503-$32,200,000) Bonds payable (To record the issuance of bonds) $ 1,846,503 $ 32,200,000 $ 2,000,675 $ 92,325 2a) December 31, 20Y1 Interest expense Premium on Bonds payable ($1,846,503/20) Cash ($32,200,000*6.5%) (To record the first semi-annual interest payment) $ 2,093,000 2b) June 30, 20Y2 $ 2,000,675 $ 92,325 Interest expense Premium on Bonds payable ($1,846,503/20) Cash ($32,200,000*6.5%) (To record the second semi-annual interest payment) $ 2,093,000

3) Total interest expense for 20Y1 = $2,000,675 4) Yes If contract rate < Market rate of return, bonds are issued at discount. If contract rate = Market rate of return, bonds are issued at face value. If contract rate > Market rate of return, bonds are issued at premium. 5) Present value of the face amount = $32,200,000*0.31180 = $10,039,960 Present value of the semi-annual interest payments = $32,200,000*6.5%*11.46992 = $24,006,543 Price received for the bonds = $10,039,960 + $ 24,006,543 = $34,046,503