Answer:
1. Record the journal entry to log the cash received from bond issuance on July 1, Year 1.
Dr Cash 37,282,062
Dr Discount on bonds payable 2,717,938
Cr Bonds payable 40,000,000
2. Make the following journal entries:
a. Document the first semiannual interest payment on December 31, Year 1, along with the bond discount amortization, utilizing the straight-line approach. Round to the nearest dollar.
discount on bonds payable = 2,717,938 / 20 coupons = $135,896.90
December 31, Year 1, first coupon payment
Dr Interest expense 1,535,896.90
Cr Cash 1,400,000
Cr Discount on bonds payable 135,896.90
b. Capture the interest payment on June 30, Year 2, and the bond discount amortization, again utilizing the straight-line method. Round to the nearest dollar.
June 30, Year 2, second coupon payment
Dr Interest expense 1,535,896.90
Cr Cash 1,400,000
Cr Discount on bonds payable 135,896.90
3. Calculate the total interest expense for Year 1.
$1,535,896.90
4. When the bond proceeds are consistently lower than the bond face value if the contract rate is lower than the market rate of interest?
yes, if the market rate exceeds the coupon rate, the bonds will be issued at a discount.
5. (Appendix 1) Calculate the receipt price of $37,282,062 for the bonds by referring to the present value tables found in Appendix A at the conclusion of the textbook. Round to the nearest dollar.
bond price = PV of face value + PV of coupon payments
- PV of face value = $40,000,000 x 0.4564 (PV factor, 4%, 20 periods) = $18,256,000
- PV of coupon payments = $1,400,000 x 13.590 (PV annuity factor, 4%, 20 periods) = $19,026,000
bond's market price = $18,256,000 + $19,026,000 = $37,282,000
