Question

1. Bond Discount, Entries for Bonds Payable Transactions

   On July 1, 2016, Brower Industries Inc. issued $5,500,000 of 7-year, 11% bonds at a market (effective) interest rate of 12%, receiving cash of $5,244,387. 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. For a compound transaction, if an amount box does not require an entry, leave it blank.

   2. Journalize the entries to record the following: For a compound transaction, if an amount box does not require an entry, leave it blank.

   a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond discount, using the straight-line method. (Round your answer 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 your answer to the nearest dollar.)

   3. Determine the total interest expense for 2016. Round to the nearest dollar.
   $

   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 $5,244,387 received for the bonds by using Table 1 and Table 2. (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	$

Answer 1

Journal entries

Date	account and explanation	debit	credit
July 1,2016	Cash	5244387
	Discount on bonds payable	255613
	Bonds payable		5500000
	(To record bond issue)
Dec 31,2016	Interest expense	320758
	Discount on bonds payable (255613/14)		18258
	Cash (5500000*11%*6/12)		302500
	(To record interest)
June 30,2017	Interest expense	320758
	Discount on bonds payable		18258
	cash		302500
	(To record interest)

3) Total Interest expense for 2016 = $320758

4) Yes, When contact rate is less than market rate bond value is less than face value..

5)

Present value of the face amount (5500000*0.4423)	2432650
Present value of the semi-annual interest payments (9.2950*302500)	2811737
Price received for the bonds	5244387