On July 1, 2016, Merideth Industries Inc. issued $47,500,000 of 10-year, 7% bond

Question

On July 1, 2016, Merideth Industries Inc. issued $47,500,000 of 10-year, 7% bonds at a market (effective) interest rate of 9%, receiving cash of $41,321,100. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

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 $41,321,100 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

1)

2)

  semiannual interest payment = 47500000*7%*1/2

  semiannual interest payment = 1662500

using the straight-line method

Amortization of the bond discount of each semi annual period = Discount on Bonds Payable/No of year *1/2

Amortization of the bond discount of each semi annual period = 6178900/10 * 1/2

Amortization of the bond discount of each semi annual period = 308945

Interest Expenses each semi annual period = 1662500 + 308945

Interest Expenses each semi annual period = 1971445

Answer

3)

Total interest expense for 2016 = $ 1971445

4)

Yes , 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)

Date Account Title & Explanation Debit Credit July 1, 2016 Cash 41321100 Discount on Bonds Payable 6178900 Bonds Payable 47500000

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