Instructions
1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2014.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2015, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2014.
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. (Appendix 1) Compute the price of 191,403,720 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.)
Answer:
1. Cash 191,403,720
Premium on Bonds Payable 41,403,720
Bonds Payable 150,000,000
2. a. Interest Expense 7,964,907
Premium on Bonds Payable* 1,035,093
Cash 9,000,000
* $41,403,720 ÷ 40 seminannual payments
b. Interest Expense 7,964,907
Premium on Bonds Payable* 1,035,093
Cash 9,000,000
* $41,403,720 ÷ 40 semiannual payments
3. $7,964,907
4. Yes. Investors will be willing to pay more than the face amount of the bonds
when the interest payments they will receive from the bonds exceed the amount
of interest that they could receive from investing in other bonds.
5. Present value of $1 for 40 semiannual
periods at 4.5% semiannual rate……………………………… 0.17193
Face amount of bonds…………………………………………… ×
Present value of annuity of $1
$150,000,000 $ 25,789,500
for 40 semiannual periods at 4.5% semiannual rate……… 18.40158
Semiannual interest payment…………………………………… × $ 9,000,000 165,614,220
Proceeds of bond issue………………………………………… $191,403,720