Question

Solve the following problem.

Bond discount, entries for bonds payable transactions

On July 1, Year 1, Danzer Industries Inc. issued $43,200,000 of 10-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $40,508,184. 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 $40,508,184 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.

CHART OF ACCOUNTSDanzer Industries Inc.General Ledger

	ASSETS
110	Cash
111	Petty Cash
121	Accounts Receivable
122	Allowance for Doubtful Accounts
126	Interest Receivable
127	Notes Receivable
131	Merchandise Inventory
141	Office Supplies
142	Store Supplies
151	Prepaid Insurance
191	Land
192	Store Equipment
193	Accumulated Depreciation-Store Equipment
194	Office Equipment
195	Accumulated Depreciation-Office Equipment

	LIABILITIES
210	Accounts Payable
221	Salaries Payable
231	Sales Tax Payable
232	Interest Payable
241	Notes Payable
251	Bonds Payable
252	Discount on Bonds Payable
253	Premium on Bonds Payable

	EQUITY
311	Common Stock
312	Paid-In Capital in Excess of Par-Common Stock
315	Treasury Stock
321	Preferred Stock
322	Paid-In Capital in Excess of Par-Preferred Stock
331	Paid-In Capital from Sale of Treasury Stock
340	Retained Earnings
351	Cash Dividends
352	Stock Dividends
390	Income Summary

	REVENUE
410	Sales
610	Interest Revenue
611	Gain on Redemption of Bonds

	EXPENSES
510	Cost of Merchandise Sold
515	Credit Card Expense
516	Cash Short and Over
521	Sales Salaries Expense
522	Office Salaries Expense
531	Advertising Expense
532	Delivery Expense
533	Repairs Expense
534	Selling Expenses
535	Rent Expense
536	Insurance Expense
537	Office Supplies Expense
538	Store Supplies Expense
541	Bad Debt Expense
561	Depreciation Expense-Store Equipment
562	Depreciation Expense-Office Equipment
590	Miscellaneous Expense
710	Interest Expense
711	Loss on Redemption of Bonds

Answer 1

Answer to Part 1.

Date	Account Titles and Explanation	Debit	Credit
July 1, Year 1	Cash	40,508,184
	Discount on Bonds Payable	2,691,816
	Bonds Payable		43,200,000
	(To record issuance of Bonds)

Answer to Part 2a.

Date	Account Titles and Explanation	Debit	Credit
Dec 31, Year 1	Interest Expense	2,078,591
	Cash		1,944,000
	Discount on Bonds Payable		134,591
	(To record semi annual interest payment)

Interest Paid = $43,200,000 *9% *6/12 = $1,944,000

Amortization of Discount on Bonds Payable = $2,691,816 * 1/10 *6/12 = $134,591

Answer to Part 2b.

Date	Account Titles and Explanation	Debit	Credit
June 30, Year 2	Interest Expense	2,078,591
	Cash		1,944,000
	Discount on Bonds Payable		134,591
	(To record semiSemi-An interest payment)

Answer to Part 3.

Total Interest Expense for Year 1 = $2,078,591

Answer to Part 4.

Yes, the proceeds will always be less if coupon rate is less than the market rare and bond will be issued at discount.

And if market rate is less than the coupon rate, the proceeds will always be more than Par value and bond will be issued at premium.