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Bond discount, entries for bonds payable transactions On July 1, year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $46,000,000 of 20 year, 10% bonds at a market (effective) interest rate of 11% receiving cash of $42,309,236. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 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 discount, using the straight-line method. Round to the nearest dollar. b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar. 3. Determine the total interest expense for Year 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. (Appendix 1) compute the price of $42,309,236 received for the bonds by using the present value tables in Appendix A at the end of the text. Round to the nearest dollar.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 14, Problem 14.2BPR
Textbook Problem

Bond discount, entries for bonds payable transactions

On July 1, year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $46,000,000 of 20 year, 10% bonds at a market (effective) interest rate of 11% receiving cash of $42,309,236. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Instructions

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 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 discount, using the straight-line method. Round to the nearest dollar.

b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar.

3. Determine the total interest expense for Year 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. (Appendix 1) compute the price of $42,309,236 received for the bonds by using the present value tables in Appendix A at the end of the text. Round to the nearest dollar.

Expert Solution

1.

To determine

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Straight-line amortization method: It is a method of bond amortization that spreads the amount of the bond discount equally over the interest period.

To prepare: Journal entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.

Explanation of Solution

Prepare journal entry for cash proceeds from the issuance of the bonds on July 1, Year 1.

Date Account Title and Explanation Post Ref Debit ($) Credit ($)
July 1, Year 1 Cash  42,309,236
Discount on Bonds Payable  (1) 3,690,764
Bonds Payable 46,000,000
(To record issuance of bonds payable at discount)

Table (1)

Working note:

Calculate discount on bonds payable...

Expert Solution

2(a)

To determine

To prepare: Journal entry to record first interest payment and amortization of bond discount on December 31, Year 1.

Expert Solution

3.

To determine
The amount of total interest expense for Year 1.

Expert Solution

4.

To determine

To explain: The situation when contract rate of bond is less than the market rate of interest.

Expert Solution

5.

To determine

To calculate: The amount of cash proceeds (present value) from the sale of the bonds using present value tables.

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Chapter 14 Solutions

Accounting
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Ch. 14 - Alternative financing plans Frey co. is...Ch. 14 - Alternative financing plans Brower co. is...Ch. 14 - Issuing bonds at face amount On January 1, the...Ch. 14 - Issuing bonds at face amount On January 1, the...Ch. 14 - Issuing bonds at a discount On the First day of...Ch. 14 - Issuing bonds at a discount On the first day of...Ch. 14 - Discount amortization Using the bond from Practice...Ch. 14 - Discount amortization Using the bond from Practice...Ch. 14 - Issuing bonds at a premium On the first day of the...Ch. 14 - Issuing bonds at a premium On the first day of the...Ch. 14 - Premium amortization Using the bond from Practice...Ch. 14 - Premium amortization Using the bond from Practice...Ch. 14 - A Redemption of bonds payable A 1,500,000 bond...Ch. 14 - Redemption of bonds payable A 1,200,000 bond issue...Ch. 14 - Journalizing installment notes On the first day of...Ch. 14 - Journalizing installment notes On the first day of...Ch. 14 - Times interest earned Berry Company reported the...Ch. 14 - Times interest earned Aver ill Products Inc....Ch. 14 - Effect of financing on earnings per share Domanico...Ch. 14 - Evaluate alternative financing plans Based on the...Ch. 14 - Corporate financing The financial statements for...Ch. 14 - Bond price Stone Energy Corporation's 7.5% bonds...Ch. 14 - Entries for issuing bonds Thomson Co. products and...Ch. 14 - Entries for issuing bonds and amortizing discount...Ch. 14 - Entries for issuing bonds and amortizing premium...Ch. 14 - Entries for issuing and calling bonds; loss Adele...Ch. 14 - Entries for issuing and calling bonds; gain Emil...Ch. 14 - Entries for installment note transactions On the...Ch. 14 - Entries for installment note transactions On...Ch. 14 - Entries for installment note transactions On...Ch. 14 - Reporting bonds At the beginning of the current...Ch. 14 - Times interest earned The following data were...Ch. 14 - Times interest earned Loomis, Inc. reported the...Ch. 14 - Times interest earned lacouva Company reported the...Ch. 14 - Present value of amounts due Tommy John is going...Ch. 14 - Present value of an annuity Determine the present...Ch. 14 - Present value of an annuity On January 1, you win...Ch. 14 - Present value of an annuity Assume the same data...Ch. 14 - Present value of bonds payable; discount Pinder...Ch. 14 - Present value of bonds payable; premium Moss Co....Ch. 14 - Amortize discount by interest method On the first...Ch. 14 - Amortize premium by interest method Shunda...Ch. 14 - Compute bond proceeds, amortizing premium by...Ch. 14 - Compute bond proceeds, amortizing discount by...Ch. 14 - Effect of financing on earnings per share Three...Ch. 14 - Bond discount, entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Entries for bonds payable and installment note...Ch. 14 - Bond discount, entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Effect of financing on earnings per share Three...Ch. 14 - Bond discount, entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Entries for bonds payable and installment note...Ch. 14 - Bond discount entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Ethics in Action CEG Capital Inc. is a large...Ch. 14 - Communication Nordbock Inc. reports the following...Ch. 14 - Present values Alex Kelton recently won the...Ch. 14 - Preferred stock vs. bonds Xentec Inc. has decided...Ch. 14 - Financing business expansion You hold a 25% common...Ch. 14 - Times interest earned The following financial data...

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