Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc.
ID: 2460219 • Letter: S
Question
Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc. issued $62,500,000 of 10-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of $66,747,178. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2016. Journalize the entries to record the following: The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) The interest payment on June 30, 2017, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) Determine the total interest expense for 2016. Answer Check Figure: $2,600,141 Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest? (Appendix 1) Compute the price of 66,747,178 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.) under appendix 4.5 (20periods) is .41464 and 4.5 13.00794
Explanation / Answer
Answer
Note
Amortisation schedule
Figures in $
Year
Cash interest
Effective interest rate
Premium amortization
Carrying value of bonds or amortized cost
4.5% Semi annual
4% Semi annual
A
B
C
62500000*0.045
Carrying value of Previous half * 0.04
A-B
Carrying value of Previous half - C
Jul-16
66747178.00
Dec-16
2812500
2669887.12
142612.88
66604565.12
Jun-17
2812500
2664182.60
148317.40
66456247.72
Dec-17
2812500
2658249.91
154250.09
66301997.63
Jun-18
2812500
2652079.91
160420.09
66141577.54
Dec-18
2812500
2645663.10
166836.90
65974740.64
Jun-19
2812500
2638989.63
173510.37
65801230.27
Dec-19
2812500
2632049.21
180450.79
65620779.48
Jun-20
2812500
2624831.18
187668.82
65433110.66
Dec-20
2812500
2617324.43
195175.57
65237935.08
Jun-21
2812500
2609517.40
202982.60
65034952.49
Dec-21
2812500
2601398.10
211101.90
64823850.59
Jun-22
2812500
2592954.02
219545.98
64604304.61
Dec-22
2812500
2584172.18
228327.82
64375976.79
Jun-23
2812500
2575039.07
237460.93
64138515.86
Dec-23
2812500
2565540.63
246959.37
63891556.50
Jun-24
2812500
2555662.26
256837.74
63634718.76
Dec-24
2812500
2545388.75
267111.25
63367607.51
Jun-25
2812500
2534704.30
277795.70
63089811.81
Dec-25
2812500
2523592.47
288907.53
62800904.28
Jun-26
2812500
2512036.17
300904.28*
62500000.00
*Adjusted balancing figure
Answer 1
Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2016.
Cash A/c Dr. $ 66747178
Bonds payable A/c Cr. $ 66747178
Answer 2
Journalize the entries to record the following: The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
Interest Expense A/c Dr. $ 2669887.12
Bonds Payable (premium amortisation) A/c Dr. $ 142612.88
To Cash A/c Cr. 2812500
Answer 3
The interest payment on June 30, 2017, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
Interest Expense A/c Dr. $ 2664182.60
Bonds Payable (premium amortisation) A/c Dr. $ 148317.40
To Cash A/c Cr. $ 2812500
Answer 4
Determine the total interest expense for 2016.
Interest Expense for 2016 is $ 2669887.12
Answer 5
Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest?
Answer : No, It is not always necessary that the bond proceeds will always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest. Sometimes Credit quality and safety of bonds issue may be weak compared other debt instruments available in market in that case investors seek higher return on such bonds issue compared market rate of interest. In Such scenario, bond proceeds will not be greater than the face amount of the bonds even though the contract rate is greater than the market rate of interest.
Answer 6
Compute the price of 66,747,178 received for the bonds by using the present value tables in Appendix A at the end of the text. (Round to the nearest dollar.) under appendix 4.5 (20periods) is .41464 and 4.5 13.00794
Figures in $
Year
Interest payment
Redemption value
Cash flow
Disc Rate : 4.5%
Present value
A
B
C
D
A+B
C*D
0.5
2812500
2812500
0.956938
2691388
1
2812500
2812500
0.91573
2575490
1.5
2812500
2812500
0.876297
2464584
2
2812500
2812500
0.838561
2358454
2.5
2812500
2812500
0.802451
2256894
3
2812500
2812500
0.767896
2159707
3.5
2812500
2812500
0.734828
2066705
4
2812500
2812500
0.703185
1977708
4.5
2812500
2812500
0.672904
1892544
5
2812500
2812500
0.643928
1811047
5.5
2812500
2812500
0.616199
1733059
6
2812500
2812500
0.589664
1658430
6.5
2812500
2812500
0.564272
1587014
7
2812500
2812500
0.539973
1518674
7.5
2812500
2812500
0.51672
1453276
8
2812500
2812500
0.494469
1390695
8.5
2812500
2812500
0.473176
1330809
9
2812500
2812500
0.4528
1273501
9.5
2812500
2812500
0.433302
1218661
10
2812500
62500000.00
65312500
0.414643
27081362
Net present value
62500000
Amortisation schedule
Figures in $
Year
Cash interest
Effective interest rate
Premium amortization
Carrying value of bonds or amortized cost
4.5% Semi annual
4% Semi annual
A
B
C
62500000*0.045
Carrying value of Previous half * 0.04
A-B
Carrying value of Previous half - C
Jul-16
66747178.00
Dec-16
2812500
2669887.12
142612.88
66604565.12
Jun-17
2812500
2664182.60
148317.40
66456247.72
Dec-17
2812500
2658249.91
154250.09
66301997.63
Jun-18
2812500
2652079.91
160420.09
66141577.54
Dec-18
2812500
2645663.10
166836.90
65974740.64
Jun-19
2812500
2638989.63
173510.37
65801230.27
Dec-19
2812500
2632049.21
180450.79
65620779.48
Jun-20
2812500
2624831.18
187668.82
65433110.66
Dec-20
2812500
2617324.43
195175.57
65237935.08
Jun-21
2812500
2609517.40
202982.60
65034952.49
Dec-21
2812500
2601398.10
211101.90
64823850.59
Jun-22
2812500
2592954.02
219545.98
64604304.61
Dec-22
2812500
2584172.18
228327.82
64375976.79
Jun-23
2812500
2575039.07
237460.93
64138515.86
Dec-23
2812500
2565540.63
246959.37
63891556.50
Jun-24
2812500
2555662.26
256837.74
63634718.76
Dec-24
2812500
2545388.75
267111.25
63367607.51
Jun-25
2812500
2534704.30
277795.70
63089811.81
Dec-25
2812500
2523592.47
288907.53
62800904.28
Jun-26
2812500
2512036.17
300904.28*
62500000.00
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