Question

Bond Premium, Entries for Bonds Payable Transactions Rodgers Corporation produces and sells football equipment. On July 1, Year 1, Rodgers issued $65,0000,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $73,100,469. 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 with a compound transaction, 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, Year 1. Year 1 July 1 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) Year 1 Dec. 31 b. The interest payment on June 30, Year 2, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) Year 2 June 30 3. Determine the total interest expense for Year 1. Round to the nearest dollar 4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest? 5. Compute the price of $73,100,469 received for the bonds by using the present value tables Exhibit 5 and Exhibit 7. Present value of the face amount Present value of the semi-annual interest payments Price received for the bonds

Answer 1

Solution:

Journal Entries

	Date	General Journal	Debit	Credit
1)	Year 1 July 1	Cash	$73,100,469
		Bonds Payable		$65,000,000
		Premium on Bonds Payable (Balancing figure)		$8,100,469
		(To record issuance of bond)
2(a)	Year 1 Dec 31	Interest Expense	$3,494,977
		Premium on Bonds Payable (Amortization) (Refer Note)	$405,023
		Interest Payable or Cash (Face value 65,000,000*12%*1/2)		$3,900,000
		(To record first semi-annual interest payment)
2(b)	Year 2 June 30	Interest Expense	$3,494,977
		Premium on Bonds Payable (Amortization) (Refer Note)	$405,023
		Interest Payable or Cash (Face value 65,000,000*12%*1/2)		$3,900,000
		(To record first semi-annual interest payment)

Straight line method

Semi-annual bond premium amortization = Total Premium / Semi-annual period to maturity

= $8,100,469 / 10 Years*2

= $8,100,469 / 20

= $405,023.45 or $405,023

Part 3 – Total Interest Expense for Year 1 = $3,494,977

Part 4 – Yes, the bond proceeds always be greater than the face value of the bonds when the contract rate is greater than the market interest rate.

Reason behind this is the investors are more interest to invest in the bonds paying higher interest in comparison to what they will get from the market. So the bonds are issued at premium.

Part 5 – Please provide the Present Value tables to solve this part.

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