Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc.
ID: 2461151 • Letter: S
Question
Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc. issued $62,500,000 of 10-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of $66,747,178. 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.* 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.) 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.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 $66,747,178 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. Present Value of $1 at Compound Interest Due in n Periods (under 4.5 (20p) is .41464 Present Value of Ordinary Annuity of $1 per Period under4.5 is 13.00794
Explanation / Answer
Solution:
Solution:
1)
July 1, 2016
Debit Amount
Credit Amount
Cash A/c Dr.
$66,747,178
To Bonds Payable
$62,500,000
To Premium on Bonds Payable
$4,247,178
(Being bonds are issued at premium)
2)
a.
Semi-annual interest payment = $62,500,000 x 9% x ½ = $2,812,500
Premium on Bonds Payable = $4,247,178 is to be amortized over the 10 years life of bonds at the time of each interest payment.
Amount to be amortized of premium on bonds payable at the time of interest payment
No. Of interest payment = 10 years x 2 = 20
Amount of Premium on Bonds Payable to be amortized on each interest payment = $4,247,178 / 20 = $212,358.90
Journal Entry to record First Semi-Annual interest payment on Dec 31, 2016 and the amortization of the bond premium
Debit Amount
Credit Amount
Interest Expenses A/c Dr.
$2,600,141.10
Premium on Bonds Payable Dr.
$212,358.90
To Cash Interest Payable to Bond Holders
$2,812,500
(Interest Expenses are recorded)
Cash Interest Payable to Bond Holders
$2,812,500
To Cash A/c
$2,812,500
(Interest is paid to bond holders)
b.
Journal Entry to record First Semi-Annual interest payment on June 30, 2017 and the amortization of the bond premium
Debit Amount
Credit Amount
Interest Expenses A/c Dr.
$2,600,141.10
Premium on Bonds Payable Dr.
$212,358.90
To Cash Interest Payable to Bond Holders
$2,812,500
(Interest Expenses are recorded)
Cash Interest Payable to Bond Holders
$2,812,500
To Cash A/c
$2,812,500
(Interest is paid to bond holders)
3)
Determine the total interest expense for 2016 using present value table (effective interest rate)
Book Value of Bonds including Premium on Bonds Payable as on July 1, 2016 = $66,747,178
Effective Interest Rate = 8% p.a. or 4% semi-annually
Interest Expenses for 6 months are recorded in the year 2016 (July 1, 2016 to Dec 31, 2016) = Book Value at the beginning of year x Market Rate = $66,747,178 x 4% = $2,669,887.12
PLEASE ASK SEPARATE QUESTION FOR REST REQUIREMENTS...
Debit Amount
Credit Amount
Cash A/c Dr.
$66,747,178
To Bonds Payable
$62,500,000
To Premium on Bonds Payable
$4,247,178
(Being bonds are issued at premium)
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