On July 1, Year 1, Livingston Corporation, a wholesaler of manufacturing equipment, issued $7,200,000 of 8-year, 11% bonds at a market (effective) interest rate of 12%, receiving cash of $6,836,187. 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, Year 1.
Year 1 July 1 Cash 309.236
Discount on Bonds Payable 3,690,764
Bonds Payable 46,000,000
2. Journalize the entries to record the following:
A. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method.
B. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the interest method.
3. Determine the total interest expense for Year 1.

Livingston Corporation

1.

Year 1 July 1

Debit Cash $6,836,187

Debit Discount on Bonds Payable $363,813

Credit Bonds Payable $7,200,000

To record bonds proceeds and liability.

2.

A. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method.

December 31, Year 1:

Debit Interest Expense $418,738

Credit Bond Discounts $22,738

Credit Cash $396,000

To record interest expense for the first six months and the amortization of bond discounts.

B. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the interest method.

December 31, Year 1:

Debit Interest Expense $411,021

Credit Bond Discounts $15,021

Credit Cash $396,000

To record interest expense for the second six months and the amortization of bond discounts.

3. Determine the total interest expense for Year 1.

Total interest expense for Year 1:

                                            Straight-                Effective

                                       Line Method       Interest Method

December 31, Year 1         $418,738                $410,171 ($6,836,187 * 6%)

= Cash payment + Semi-annual

Amortization of bonds discount

=                        ($396,000 + $22,738)    

Explanation:

a) Data and Calculations:

Face value of bonds issued = $7,200,0

Cash received = $6,836,187

Total bonds discount = $363,813 ($7,200,000 - $6,836,187)

Period of bonds = 8 years

Interest rate of bonds = 11%

Effective interest rate = 12%

Semi-annual cash payment = $396,000 ($7,200,000 * 11% * 6/12)

First interest expense on December 31 Year 1 = $410,171 ($6,836,187 * 12% * 6/12)

Amortization of bond discount for the first six months = $14,171 ($410,171 - $396,000)

Bond balance after the first six months = $6,850,358 ($6,836,187 + $14,171)

Second interest expense on June 30, Year 2 = $411,021 ($6,850,358 * 6%)

Amortization of bond discount for the second six months (June 30, Year 2) = $15,021 ($411,021 - $396,000)

Bond balance on June 30, Year 2 = $6,865,379 ($6,850,358 + $15,021)

Straight-line method amortization:

Semi-annual amortization of bond discount = $22,738 ($363,813/16)

Interest expense = $396,000