Fabulator, Inc. produces and sells fashion clothing. On July 1, 2012, Fabulator,
ID: 2473447 • Letter: F
Question
Fabulator, Inc. produces and sells fashion clothing. On July 1, 2012, Fabulator, Inc. issued $120,000,000 of 20-year, 14% bonds at a market (effective) interest rate of 11%, receiving cash of $148,882,608. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Required:
For all journal entries with a compound transaction, if an amount box does not require an entry, leave it blank.
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 premium, using the INTEREST METHOD (not straight line.). (Round to the nearest dollar.)
b. The interest payment on June 30, 2013, and the amortization of the bond premium, using the INTEREST METHOD (not straight line.). (Round to the nearest dollar.)
3. Determine the total interest expense for 2012.
$
4. 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?
5. Compute the price of $148,882,608 received for the bonds by using the tables of present value in Appendix A. (Round to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.
Present value of the face amount $
Present value of the semi-annual interest payments $
Price received for the bonds $
Explanation / Answer
3. Total interest expense for 2012 is $ 8,188,543.
4. Yes, always. If the market required rate of return is lower than the interest rate payable on bond, the value of the bond shall be higher than the face amount of the bonds. This is because, while computing the present worth of the bonds, the coupon rate is in the numerator in the equation, and the market interest rate ( at which the cash flows associated with the bond are discounted) is in the denominator.
5.Present value of face amount at discount rate of 5.5% at the end of 40 periods = $ 120,000,000 x 0.1175 = $ 14,100,000 approx.
Present value of semi annual interest payments at discount rate of 5.5% for 40 periods= $ 8,400,000 x 16.0461=
$ 134,787,240 approx.
Price received fpr the bonds = $ 148,882,608
Date Account Titles Debit Credit $ $ July 1, 2012 Cash 148,882,608 Bonds payable 120,000,000 Premium on bonds payable 28,882,608 December 31, 2012 Interest expense 8,188,543 Premium on bonds payable 211,457 Cash 8,400,000 June 30, 2013 Interest expense 8,176,913 Premium on bonds payable 223,087 Cash 8,400,000Related Questions
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