ACCOUNTING 232, Edition 24. PR 14-3A BOND PREMIUM, ENTRIES FOR BONDS PAYABLE TRA

Question

ACCOUNTING 232, Edition 24. PR 14-3A BOND PREMIUM, ENTRIES FOR BONDS PAYABLE TRANSACTIONS Fabulator, Inc, produces and sells fashion clothing. On July 1, 2012, Fabulator, Inc. issued $120,000,000 of 20 year, 14% bonds at a market (effective) interest rate of 11%, receiving cash of $148,882,608. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year. Instructions: 1. Journalize the entry to record the amount of cash proceeds from the sale of the bonds. 2. Journalize the entiries to record the following a. the first semiannual interest payment on December 31, 2012, and the amortization of the bond premium, using the striaght-line method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2012. 4. Will the bond proceeds always be greater than the face amount of the bonds when the contract is greater than the market rate of interest?

Explanation / Answer

1. Journalize the entry to record the amount of cash proceeds from the sale of the bonds.
Cash (Dr.) 148,882,608
Bonds payable (Cr.) 120,000,000
Premium on bonds payable (Cr.) 28,882,608

2. Journalize the entiries to record the following a. the first semiannual interest payment on December 31, 2012, and the amortization of the bond premium, using the striaght-line method. (Round to the nearest dollar.)
Interest expense (Dr.) 8,400,000 (120,000,000*14%/2)
Cash (Cr.) 8,400,000

Premium on bonds payable (Dr.) 722,065 (28882608/20/2)
Interest expense (Cr.) 722,065

3. Determine the total interest expense for 2012.
Interest expense = 7,677,395 (8400000-722065)

4. Will the bond proceeds always be greater than the face amount of the bonds when the contract is greater than the market rate of interest?
Yes, the buyer will be willing to pay more for a bond that pays higher interest than the market.

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