On July 1, 2012, Bliss industries Inc. issued $24,000,000 of 20-year, 11% bonds

Question

On July 1, 2012, Bliss industries Inc. issued $24,000,000 of 20-year, 11% bonds at a market (effective) interest rate of 14%, receiving cash of $19,200,577. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Instructions
1. Journalize the entry to record the amount of cash proceeds from the sale of the bonds.
2. Journalize the entries to record the following:
a. The first semiannual interest payment on December 31, 2012, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2013, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
3. Determine the total interest expense for 2012.
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?
5. (Appendix 1) Compute the price of $19, 200,577 received for the bonds by using the tables of present value in Appendix A at the end of the text. (Round to the nearest dollar.)

Explanation / Answer

1. Journalize the entry to record the amount of cash proceeds from the sale of the bonds. If an amount box does not require an entry, leave it blank. Debit Cash $19,200,577 Debit Bond Discount $4,799,423 Credit Bonds Payable $24,000,000 2. Journalize the entries to record the following: (If an amount box does not require an entry, leave it blank.) a. The first semiannual interest payment on December 31, 2010, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) Debit Interest Expense: Credit Cash $1,320,000 (24M * .11 * 6/12) Credit Bond Discount $119,985.57 ($4,799,423 / 40) - you divide by 40 since the bonds have a 20 year life, and interest is paid semiannually) b. The interest payment on June 30, 2011, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) Same as above since you are using the straight line method 3. Determine the total interest expense for 2010. Since only one payment was made in 2010, the interest expense is the same as the debit interest expense

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