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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.

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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Section
BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 2PB
Textbook Problem
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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. 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.
  2. 2. Journalize the entries to record the following:
    1. 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.
    2. 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. 3. Determine the total interest expense for Year 1.
  4. 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. 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.

1.

To determine

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

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued 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.

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

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
July 1, Year 1Cash   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)

  • Cash is an asset and it is increased...

2(a)

To determine

Prepare journal entry to record first interest payment and amortization of bond discount on December 31, Year 1.

b.

To determine

Prepare journal entry to record second interest payment and amortization of bond discount on June 30, Year 2.

3.

To determine

Calculate the amount of total interest expense for Year 1.

4.

To determine

Explain the situation when contract rate of bond is less than the market rate of interest.

5.

To determine

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

Financial Accounting
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