On July 1, 2016, Merideth Industries Inc. issued $35,400,000 of 10-year, 6% bond

Question

On July 1, 2016, Merideth Industries Inc. issued $35,400,000 of 10-year, 6% bonds at a market (effective) interest rate of 8%, receiving cash of $30,589,136. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

Present Value Tables

Two present value tables are provided: Present Value of $1 at Compound Interest Due in n Periods and Present Value of Ordinary Annuity of $1 per Period. Use them as directed in the problem requirements.

Present Value of $1 at Compound Interest Due in n Periods

Present Value of Ordinary Annuity of $1 per Period

Chart of Accounts

Journal

1. and 2. Journalize the entries to record the transactions. Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

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Final Questions

3. Determine the total interest expense for 2016.

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?

Yes

No

5. Compute the price of $30,589,136 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar.)

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2016.* 2. Journalize the entries to record the following:* a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2016. 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. Compute the price of $30,589,136 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar.) *Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.

Explanation / Answer

3) Total interest expense for the year 2016 = $1302543

4) Yes, when the bonds are issued if the market rate of interest is more than the coupon rate of the bond issued, the bonds will have to be issued at a discount to compensate the higher yield of the market for the same amount of money.

5)

Market price of the bond

= PV of cash outflow for the semi-annual interest payment discounted at semi-annual market rate of interest + PV of the cash outflow at the time of maturity discounted at semi-annual market rate of interest.

= Semi-annual interest payment x PVIFA (4%, 20) + $35400000 x PVIF (4%, 20)

= $1062000 x 13.59033 + $35400000 x 0.45639

=$30589136

Date Account Title and Explanations Debit($) Credit($) July1, 2016 Cash 30589136 Discount on Issue of Bonds 4810864 Bonds Payable 35400000 (Issue of bond at a discount) Dec 31, 2016 Interest Expense 1302543 discount on bonds payable 240543 Cash 1062000 (payment of interest and amortization of discount on bonds recorded) June 30, 2017 Interest Expense 1302543 discount on bonds payable 240543 Cash 1062000 (payment of interest and amortization of discount on bonds recorded)

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