Question

On July 1, 2014, 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.Instructions1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds.2. Journalize the entries to record the following:a. The first semiannual interest payment on December 31, 2014, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)b. The interest payment on June 30, 2015, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)3. Determine the total interest expense for 2014.

Answer 1

1.

Dr. Cash $42,309,236

Dr. Discount on Bond $3,690,764

Cr. Bond payable $46,000,000

2.

a.

December 31, 2014

Dr. Interest Expense $2,392,269.1

Cr. Discount on Bond $92,269.1

Cr. Bond Interest Payable $2,300,000

b.

June 30, 2015

Dr. Interest Expense $2,392,269.1

Cr. Discount on Bond $92,269.1

Cr. Bond Interest Payable $2,300,000

3.

$2,392,269.1

Step-by-step explanation:

The bond is issued on discount when the bond issuance proceeds are less than the face value of the bond. The discount is expensed over the bond period until maturity. It is added to the interest expense value to expense it.

Discount Value = $46,000,000 - 42,309,236 = $3,690,764

Amortization of Discount = $3,690,764 / (20 x 2) = 92,269.1

Coupon Payment = $46,000,000 x 10% x 6/12 = $2,300,000

Total Interest Expense = $2,300,000 + $92,269.1 = $2,392,269.1