Buddie Corporation Produces and sells baseball gloves. On July 1, 2012, Budddie Corporation issued $12,500,000 of 10-year, 14% bonds at a market (effective) interest rate of 12%, receiving cash of $13,933,680. 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 entries to record the following:
a. the first semiannual interest payment on December 31, 2012, and the amortization of the bond premium, using the straight-line method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2013, and the amortization of the bond premium, using the straight-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 rate is greater than the market rate of interest?
5. (Appendix 1) Compute the price of $13,933,680 received for the bonds by using the tables of present value in Appendix A at the end of the text. (Round to the nearest dollar.)

1. Cash...................................................................................... 13,933,680

Premium on Bonds Payable..................................... 1,433,680

Bonds Payable.......................................................... 12,500,000

2. a. Interest Expense............................................................. 803,316

Premium on Bonds Payable ($1,433,680 / 20)........ 71,684

.......................................................................... Cash 875,000

b. Interest Expense............................................................. 803,316

Premium on Bonds Payable..................................... 71,684

.......................................................................... Cash 875,000

3. $803,316

4. Yes. Investors will be willing to pay more than the face amount of the bonds when the interest payments they will receive from the bonds exceed the amount of interest that they could receive from investing in other bonds.

5. Present value of $1 for 20 (semiannual)

periods at 6% (semiannual rate)..................................... 0.3118

Face amount......................................................................... × $12,500,000 $ 3,897,500

Present value of annuity of $1 for 20 periods at 6%............ 11.46992

Semiannual interest payment................................................ × $875,000 10,036,180

Proceeds of bond issue......................................................... $13,933,680