Answer:
1.Dr Cash 37,282,062
Dr Discount on bonds payable 2,717,938
Cr Bonds payable 40,000,000
2a.Dr Interest expense 1,535,896.90
Cr Cash 1,400,000
Cr Discount on bonds payable 135,896.90
b.Dr Interest expense 1,535,896.90
Cr Cash 1,400,000
Cr Discount on bonds payable 135,896.90
3.$1,535,896.90
4. Yes
5.$37,282,000
Explanation:
1. Preparation of the Journal entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.
Dr Cash 37,282,062
Dr Discount on bonds payable 2,717,938
(40,000,000-37,282,062)
Cr Bonds payable 40,000,000
2. Preparation of the Journal entries to record the following:
a. Journal entry to record the first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount
First coupon payment December 31, Year 1, f
Dr Interest expense 1,535,896.90
(1,400,000+135,896.90)
Cr Cash 1,400,000
Cr Discount on bonds payable 135,896.90
(2,717,938 / 20 coupons = $135,896.90)
b. Journal entry to record the interest payment on June 30, Year 2, and the amortization of the bond discount
June 30, Year 2, second coupon payment
Dr Interest expense 1,535,896.90
Cr Cash 1,400,000
Cr Discount on bonds payable 135,896.90
(2,717,938 / 20 coupons = $135,896.90)
3. Calculation to Determine the total interest expense for Year 1.
Cash 1,400,000 + Discount on bonds payable 135,896.90 = $1,535,896.90
4. Yes the bond proceeds will always be less than the face amount of the bonds in a situation where the contract rate is less than the market rate of interest because if we have a high market rate than the coupon, this would mean that the bonds will sell at a discount
5. Computation for the price of $37,282,062 received for the bonds using the present value tables
PV factor, 4%, 20 periods =0.4564
PV annuity factor, 4%, 20 periods =13.590
Present Value (Face value) = $40,000,000 x 0.4564 = $18,256,000
PV of coupon payments = $1,400,000 x 13.590 = $19,026,000
Therefore the bond's market price will be:
Present Value (Face value) +PV of coupon payments
Bond's market price = $18,256,000 + $19,026,000
b
Bond's market price = $37,282,000
