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

Question

On July 1, 2016, Merideth Industries Inc. issued $35,400,000 of 10-year, 10% bonds at a market (effective) interest rate of 12%, receiving cash of $31,339,478. 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.

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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 $31,339,478 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 $31,339,478 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) Date Account titles & Explanations Debit Credit 7/1/2016 Cash 31,339,478 Discount on bonds payable 4,060,522 Bonds payable 35,400,000 2) Date Account titles & Explanations Debit Credit a) 12/31/2016 Interest expense 1973026 Discount on bonds payable(4060522/20) 203026 Cash (35,400,000*5%) 1770000 b) 6/30/2017 Interest expense 1973026 Discount on bonds payable(4060522/20) 203026 Cash (35,400,000*5%) 1770000 3) total interest expense for 2016 1973026 4) Yes 5) Caluclation of bond issue price where i=6% t= 20 years for principal use PV of $1 table for interest use PV of ordinary annuity table Discount principal * factor = amount 35400000 * 0.3118 = 11037720 interest * Factor = amount 1770000 * 11.46992 = 20301758 Bond issue price 31339478 present value of the face amount 11037720 present value of the semi annual interest payments 20301758 price received for bonds 31339478

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