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 $73,100,469 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 73,100,469
Premium on Bonds Payable 8,100,469
Bonds Payable 65,000,000
2. a. Interest Expense 3,494,977
Premium on Bonds Payable* 405,023
Cash 3,900,000
*$8,100,469 ÷ 20 semiannual periods
b.
Interest Expense 3,494,977
Premium on Bonds Payable* 405,023
Cash 3,900,000
*$8,100,469 ÷ 20 semiannual periods
3. $3,494,977
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 20 semiannual
periods at 5% semiannual rate………………………………… 0.37689
Face amount of bonds……………………………………………
Present value of annuity of $1
× $65,000,000 $24,497,850
for 20 semiannual periods at 5% semiannual rate………… 12.46221
Semiannual interest payment…………………………………… × $ 3,900,000 48,602,619
Proceeds of bond issue…………………………………………… $73,100,469