On July 1, 2012, Bower Industry\'s Inc. issued $3,900,000 of 10-year, 9% bonds a

Question

On July 1, 2012, Bower Industry's Inc. issued $3,900,000 of 10-year, 9% bonds at a market (effective) interest rate of 11%, receiving cash of $3,433,935. Interest on the bonds is payable SEMIANNUALLY on Dec.31 & June 30. The fiscal year of the company is the calander year.
(a) Journalize the entry to record the amount of cash proceeds from the sale of bonds.
(b) Journalize the entries to record the following : The first semiannual interest payment on Dec31, 2012, & the amortization of the bond discount, using the STRAIGHT LINE METHOD.
(C) The interest payment on June 30, 2013 & the amortization of the bond discount, using the STRAIGHT LINE METHOD.
(d) Determine the total interest expense for 2012
(e) Compute the price of $3,433,935 received for the bonds by using the tables of present value in APPEXDIX A . Your total may vary slightly from the price given due to rounding differences.

Explanation / Answer

(a). Entry to record the cash proceeds from sale of bonds: Date Particulars Dr $ Cr $ 1/7/2012 Cash 3,433,935 Discount on bonds 466,065            Bonds payable 3,900,000 (to record the cash proceeds from the sale of bonds) Date Particulars Dr $ Cr $ 1/7/2012 Cash 3,433,935 Discount on bonds 466,065            Bonds payable 3,900,000 (to record the cash proceeds from the sale of bonds) (b). Journal entry: Bond discount amortization in straight line method Bond discount amortization = Bond discount / Number of interest periods                                           = 466,065 / 20 Bond discount amortization = 23,303 Date Particulars Dr $ Cr $ 31/12/2012 Interest expense 332,357          Discount on bonds 23,303          Interest payable 309,054 (to record accrued bond interest and amortization 0f bond discount) Date Particulars Dr $ Cr $ 31/12/2012 Interest expense 332,357           Cash 332,357 (to record the payment of interest) Bond discount amortization in straight line method Bond discount amortization = Bond discount / Number of interest periods                                           = 466,065 / 20 Bond discount amortization = 23,303 Date Particulars Dr $ Cr $ 31/12/2012 Interest expense 332,357          Discount on bonds 23,303          Interest payable 309,054 (to record accrued bond interest and amortization 0f bond discount) Date Particulars Dr $ Cr $ 31/12/2012 Interest expense 332,357           Cash 332,357 (to record the payment of interest) (c). Entry for interest payment: Date Particulars Dr $ Cr $ 30/6/2013 Interest expense 353,097           Cash 353,097 (to record the payment of interest) Date Particulars Dr $ Cr $ 30/6/2013 Interest expense 353,097           Cash 353,097 (to record the payment of interest) (d).Total interest expense: Interest expense for 1st 6 months = 374,303 Interest expense for 2nd 6months = 353,097 Total interest expense for 2012    = $685,454 Interest expense for 1st 6 months = 374,303 Interest expense for 2nd 6months = 353,097 Total interest expense for 2012    = $685,454 (d). Present value of receipt = 0.917 x $3,433,935                                     = 3,148,918 Date Particulars Dr $ Cr $ 1/7/2012 Cash 3,433,935 Discount on bonds 466,065            Bonds payable 3,900,000 (to record the cash proceeds from the sale of bonds)

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