Answer:
Rodgers Corporation
Journal Entries:
1. July 1, Year 1:
Debit Cash $73,100,469
Credit Bonds Payable $65,000,000
Credit Bonds Premium $8,100,469
To record the issuance of bonds at a premium.
2. a) December 31, Year 1:
Debit Interest Expense $3,494,976.55
Debit Amortization $405,023.45
Credit Cash $3,900,000.00
To record the first semi-annual interest payment, including amortization.
b) June 30, Year 2:
Debit Interest Expense $3,494,976.55
Credit Amortization $405,023.45
Credit Cash $3,900,000.00
To record the second semi-annual interest payment, including amortization.
3. The total interest expense for Year 1 is $3,494,976.55
4. Yes. The bonds are issued at a premium. So the bond proceeds will always be greater than the face amount, and the contract rate (coupon rate) will always be greater than the market (effective) rate.
5. The price of $73,100,469 received for the bonds by using the present value tables is $1,124.62 ($73,100,469/65,000) per $1,000.
Explanation:
a) Data and Calculations:
Face value of bonds issued = $65,000,000
Price received from the issue $73,100,469
Premium received = $8,100,469
Period of maturity = 10 years
Coupon interest rate = 12%
Market (effective) interest rate = 10%
Payment of interest = semiannually on December 31 and June 30
Analysis of Journal Entries:
1. July 1, Year 1:
Cash $73,100,469 Bonds Payable $65,000,000 Bonds Premium $8,100,469
2. a) December 31, Year 1:
Interest Expense $3,494,976.55 Amortization $405,023.45 Cash $3,900,000.00
b) June 30, Year 2:
Interest Expense $3,494,976.55 Amortization $405,023.45 Cash $3,900,000.00
N (# of periods) 20
I/Y (Interest per year) 10
PMT (Periodic Payment) 3900000
FV (Future Value) 65000000
Results
PV = $73,100,439
Sum of all periodic payments = $78,000,000.00
Total Interest $69,899,569
