Question

On July 1, 20Y1, 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. Required: For all journal entries, 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, 20Y1. 20Y1 July 1 2. Journalize the entries to record the following: a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar. 20Y1 Dec. 31 b. The interest payment on June 30, 20Y2, and the amortization of the bond discount, using the straight-line method. Round to the nearest dollar. 20Y2 June 30 3. Determine the total interest expense for 20Y1. $ 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

Answer 1

Answer and Explanation:

1 . The journal entries are shown below;

Cash Dr $42,309,236

Discount on bond payable $3,690,764

To Bond payable $46,000,000

(Being the issuance of the bond is recorded)

2. a.

Interest expense Dr $2,392,269

To Discount on bond payable ($3,690,764 ÷ 20 years × 2) $92,269.10

To Cash $23,000,000 ($46,000,000 ÷ 2 years)

(Being the interest expense is recorded)

b.

Interest expense Dr $2,392,269

To Discount on bond payable ($3,690,764 ÷ 20 years × 2) $92,269.10

To Cash $23,000,000 ($46,000,000 ÷ 2 years)

(Being the interest expense is recorded)

3. Total interest expense is $2,392,269

4. Yes, bond payments will always be lower than the face value of bonds, if the contract rate is lower than the interest rate on the market.