Question

On July 1, Year 1, Danzer Industries Inc. issued $40,000,000 of 10-year, 7% bonds at a market (effective) interest rate of 8%, receiving cash of $37,282,062. 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, Year 1. 2. Journalize the entries to record the following:* a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) 3. Determine the total interest expense for Year 1. 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. Compute the price of $37,282,062 received for the bonds by using the present value tables. (Round to the nearest dollar.) *Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

Discount = Face value -issue price

        = 4000000-37282062

          = 2717938

semiannual months = 10*2= 20

Discount amortisation per semiannual month = 2717938/20 = 135896.90   [rounded to 135897]

1& 2)

Date	Account	Debit	credit
year1
1 july	cash	37282062
	Discount on bond payable	2717938
	Bond payable		40000000
31 dec	Interest expense	1535897
	Discount on bond payable		135897
	cash   [40000000*.07*6/12]		1400000
year 2
30 june	Interest expense	1535897
	Discount on bond payable		135897
	cash		1400000

3)Interest expense for year 1 : $ 1535897

4)Yes ,when the coupon rate is less than market rate ,bond proceeds will always be less than face value.

semiannual yield(market rate) = 8*6/12 =4%

Price =[PVA 4%,20*Interest]+[PVF 4%,20*face value]

=[13.59033*1400000]+[.45639*40000000]

= 19026462+ 18255600

=37282062