Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc.
ID: 2465657 • Letter: S
Question
Saverin Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin Inc. issued $21,000,000 of 10-year, 13% bonds at a market (effective) interest rate of 12%, receiving cash of $22,204,241. 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.) 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 $22,204,241 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
Cash (for interest paid) = 21,000,000 *.13 *6/12 = 1365000
Premium on bond payable amortization = 1204241 / 20 (semiannual months) = 60212.05
3)Total interest expense for 2016 = 1304787.95
4)Yes ,bonds will always trade at premium when coupon rate is greater than market rate
5)Price = (PVAF@6%,20 * Interest ) +(PVF@6%,20 *Face value)
=(11.46992* 1365000) + (.31180 * 21000000)
= 15656442.46+ 6547800
= 22204241
Date Account title Debit credit July 1 2016 Cash 22,204,241 Bond payable 21,000,000 Premium on bond payable 1,204,241 [being bond issued ] 31 dec 2016 Interest expense 1304787.95 Premium on bond payable 60212.05 cash 1365000 [First semiannual payment recorded] 30 june 27 Interest expense 1304787.95 Premium on bond payable 60212.05 cash 1365000 [second interest payment recorded ]Related Questions
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