On July 1, 2012, Hallo Corporation, a wholesaler of communication equipment, issued $34,000,000 of 20-year, 12% bonds at a market (effective) interest rate of 13%, receiving cash of $31,595,241. 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 discount, using the straight-line method. (Round to the nearest dollar.)
b. The interest payment on June 30, 2013, and the amortization of the bond discount, 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 less than the face amount of the bonds when the contract rate is less than the market rate of interest?
5. (Appendix 1) Compute the price of $31,595,241 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...................................................................................... 31,595,241

Discount on Bonds Payable................................................. 2,404,759

Bonds Payable................................................................ 34,000,000

2. a. Interest Expense............................................................. 2,100,119

Discount on Bonds Payable

($2,404,759 / 40)..................................................... 60,119

Cash.......................................................................... 2,040,000

b. Interest Expense............................................................. 2,100,119

Discount on Bonds Payable..................................... 60,119

Cash.......................................................................... 2,040,000

3. $2,100,119

4. Yes. Investors will not be willing to pay the face amount of the bonds when the interest payments they will receive from the bonds are less than the amount of interest that they could receive from investing in other bonds.

5. Present value of $1 for 40 (semiannual)

periods at 6.5% (semiannual rate).................................. 0.08054

Face amount......................................................................... × $34,000,000 $ 2,738,360

Present value of annuity of $1 for 40 periods at 6.5%......... 14.14553

Semiannual interest payment................................................ × $2,040,000 28,856,881

Proceeds of bond issue......................................................... $31,595,241