Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc.

Question

Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc. issued $60,400,000 of 10-year, 6% bonds at a market (effective) interest rate of 5%, receiving cash of $65,107,866. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.

Required:

Present Value Tables

Two present value tables are provided: Present Value of $1 at Compound Interest Due in n Periods and Present Value of Ordinary Annuity of $1 per Period. Use them as directed in the problem requirements.

Present Value of $1 at Compound Interest Due in n Periods

Present Value of Ordinary Annuity of $1 per Period

Chart of Accounts

Journal

1. and 2. Journalize the entries to record the transactions. Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

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Final Questions

3. Determine the total interest expense for 2016.

4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest?

Yes

No

5. Compute the price of $65,107,866 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar.)

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, 2016.* 2. Journalize the entries to record the following:* a. The first semiannual interest payment on December 31, 2016, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 2017, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.) 3. Determine the total interest expense for 2016. 4. Will the bond proceeds always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest? 5. Compute the price of $65,107,866 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar.) *Be sure to include the year in the date for the entries. Refer to the Chart of Accounts for exact wording of account titles.

Explanation / Answer

1.

1-7-2016

Cash a/c Dr. 65107866

To Premium on issue of bond A/c 4707866

To 6% bond a/c 60400000

2a.

31-12-2016

Interest A/c dr. 1341213

Premium on issue of bond A/c Dr. 470787

To Cash a/c 1812000

2b.

30-6-2017

Interest A/c dr. 1341213

Premium on issue of bond A/c Dr. 470787

To Cash a/c 1812000

3.

total interest expense on 2016 $1341213

4.

not necessarily

5.

present value of the face amount = 60400000*.61391 = $37080164

half year interest pv = 1812000*15.5891 = $28247449

price receive for the bond $65327613

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