On July 1, 20Y1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $2,500,000 of 8-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $2,369,220. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Bond Discount, Entries for Bonds Payable Transactions
On July 1, 20Y1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $2,500,000 of 8-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $2,369,220. 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
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 20Y1.
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Cash | Cash | |
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Discount on Bonds Payable | Discount on Bonds Payable | |
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Bonds Payable | Bonds Payable |
Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.
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Interest Expense | Interest Expense | |
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Discount on Bonds Payable | Discount on Bonds Payable | |
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Cash | Cash |
The straight-line method of amortization provides equal amounts of amortization over the life of the bond.
b. The interest payment on June 30, 20Y2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.
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Interest Expense | Interest Expense | |
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Discount on Bonds Payable | Discount on Bonds Payable | |
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Cash | Cash |
The straight-line method of amortization provides equal amounts of amortization over the life of the bond.
3. Determine the total interest expense for 20Y1. Round to the nearest dollar.
$fill in the blank 9ec49b0bbf9bfdb_1
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 $2,369,220 received for the bonds by using the present value tables in Appendix A. Round your PV values to 5 decimal places and the final answers to the nearest dollar. Your total may vary slightly from the price given due to rounding differences.
| Present value of the face amount | $fill in the blank 9ec49b0bbf9bfdb_3 |
| Present value of the semiannual interest payments | fill in the blank 9ec49b0bbf9bfdb_4 |
| Price received for the bonds | $fill in the blank 9ec49b0bbf9bfdb_5 |
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