Question

Rodgers Corporation produces and sells football equipment. On July 1, Year 1, Rodgers issued $65,000,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $73,100,469. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:
For all journal entries with a compound transaction, if an amount box does not require an entry, leave it blank.
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 premium, 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 premium, using the straight-line method. (Round to the nearest dollar.)
3. Determine the total interest expense for Year 1. Round to the nearest dollar.
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. Compute the price of $73,100,469 received for the bonds by using the present value tables

Answer 1

Rodgers Corporation

Journal Entries:

1. July 1, Year 1:

Debit Cash $73,100,469

Credit Bonds Payable $65,000,000

Credit Bonds Premium $8,100,469

To record the issuance of bonds at a premium.

2. a) December 31, Year 1:

Debit Interest Expense $3,494,976.55

Debit Amortization $405,023.45

Credit Cash $3,900,000.00

To record the first semi-annual interest payment, including amortization.

b) June 30, Year 2:

Debit Interest Expense $3,494,976.55

Credit Amortization $405,023.45

Credit Cash $3,900,000.00

To record the second semi-annual interest payment, including amortization.

3. The total interest expense for Year 1 is $3,494,976.55

4. Yes. The bonds are issued at a premium. So the bond proceeds will always be greater than the face amount, and the contract rate (coupon rate) will always be greater than the market (effective) rate.

5. The price of $73,100,469 received for the bonds by using the present value tables is $1,124.62 ($73,100,469/65,000) per $1,000.

Step-by-step explanation:

a) Data and Calculations:

Face value of bonds issued = $65,000,000

Price received from the issue $73,100,469

Premium received = $8,100,469

Period of maturity = 10 years

Coupon interest rate = 12%

Market (effective) interest rate = 10%

Payment of interest = semiannually on December 31 and June 30

Analysis of Journal Entries:

1. July 1, Year 1:

Cash $73,100,469 Bonds Payable $65,000,000 Bonds Premium $8,100,469

2. a) December 31, Year 1:

Interest Expense $3,494,976.55 Amortization $405,023.45 Cash $3,900,000.00

b) June 30, Year 2:

Interest Expense $3,494,976.55 Amortization $405,023.45 Cash $3,900,000.00

N (# of periods) 20

I/Y (Interest per year) 10

PMT (Periodic Payment) 3900000

FV (Future Value) 65000000

Results

PV = $73,100,439

Sum of all periodic payments = $78,000,000.00

Total Interest $69,899,569