On July 1, 2016, Merideth Industries Inc. issued $37,400,000 of 10-year, 9% bond
ID: 2465656 • Letter: O
Question
On July 1, 2016, Merideth Industries Inc. issued $37,400,000 of 10-year, 9% bonds at a market (effective) interest rate of 11%, receiving cash of $32,930,592. 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 $32,930,592 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
Solution:
1. & 2) Preparing the entries to record the transactions:
3) Determining the Total Interest expense for 2016:
Total interest expense for 2016. = Interest Payment + Amortization of Discount
Total interest expense for 2016. = $37,400,000 * 9% * 1/2 + $4,469,408/(10*2)
Total interest expense for 2016. = $1,906,470
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. Calculation of the price of $32,930,592 received for the bonds:
Present value of the face amount = $37,400,000 * PV (11%/2 , 20)
Present value of the face amount = $37,400,000 * 0.34273
Present value of the face amount = $12,818,102
Present value of the semiannual interest payments = $1,683,000 * PVA (11%/2 ,20)
Present value of the semiannual interest payments= $1,683,000 * 11.95038
Present value of the semiannual interest payments = $20,112,490
Price received for the bonds = Present value of the face amount + Present value of the semiannual interest payments
Price received for the bonds = $12,818,102 + $20,112,490
Price received for the bonds = $32,930,592
Date General Journal Debit Credit July 1, 2016 Cash $32,930,592 Discount on Bonds Payable ($37,400,000 - $32,930,592) $4,469,408 Bonds Payable $37,400,000 December 31, 2016 Interest Expenses $1,906,470 Cash $1,683,000 Discount on Bonds Payable $223,470 June 30, 2017 Interest Expenses $1,906,470 Cash $1,683,000 Discount on Bonds Payable $223,470Related Questions
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