Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc.

Question

Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc. issued $84,100,000 of 10-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $94,580,761. 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 premium, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond premium, 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 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 $94,580,761 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

Amount Time Bond of issued Market/Effective Received Cash Bond issued 84100000 10 Year 12% 10% 94580761 1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2016 Date Account Debit Credit Working 01-Jul-16 Cash 94580761 Bond Payable 84100000 Bond Premium 10480761 94580761-84100000 2a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the straight-line method. Date Account Debit Credit Working 31-Dec-16 Interest Expense 4521962 Interest (84100000*12%/2)-(10480761/20) Bond Premium 524038 Premium Amortization 10480761/20 Cash 5046000 84100000*12%/2 2b. Date Account Debit Credit Working 30-Jun-17 Interest Expense 4521962 Interest (84100000*12%/2)-(10480761/20) Bond Premium 524038 Premium Amortization 10480761/20 Cash 5046000 84100000*12%/2 3. Total Interest Expense for 2016 Interest 84100000*12%/2 5046000 Less: Premium Amortization 10480761/20 524038 Net Total Interest for 2016 4521962 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 Yes. As present Value of proceeds will always be greater 5. Compute the price of $94,580,761 received for the bonds by using the tables shown in Present Value Tables N (10*2) 20 Coupons (1000*12%/2) 60 YTM (10%/2) 5% Year PV at 5% Coupon and Face value Price 1124.62 1 0.952380952 60 57.14285714 2 0.907029478 60 54.42176871 3 0.863837599 60 51.83025591 4 0.822702475 60 49.36214849 5 0.783526166 60 47.01156999 6 0.746215397 60 44.7729238 7 0.71068133 60 42.64087981 8 0.676839362 60 40.61036172 9 0.644608916 60 38.67653497 10 0.613913254 60 36.83479521 11 0.584679289 60 35.08075735 12 0.556837418 60 33.41024509 13 0.530321351 60 31.81928104 14 0.505067953 60 30.30407718 15 0.481017098 60 28.86102589 16 0.458111522 60 27.48669132 17 0.436296688 60 26.17780126 18 0.415520655 60 24.93123929 19 0.395733957 60 23.74403742 20 0.376889483 1060 399.5028518 1124.622103

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