Question

On July 1, Year 1, Danzer Industries Inc. issued $26,600,000 of 10-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $25,010,623. 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 $25,010,623 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

Date	Accounting titles & Explanations				Debit	Credit
1-Jul	Cash				25,010,623
	Discount on bonds payable				1,589,377
	Bonds payable					26,600,000
2-a)
31-Dec	interest expense				1409469
	Discount on bonds		(1,589,377/20)			79469
	cash	(26,600,000*5%)				1330000
2-b)
30-Jun	interest expense				1409469
	Discount on bonds		(223,940/10)			79469
	cash	(26,600,000*5%)				1330000
3)	total interest expense for year 1
	1,409,469
4)	yes
	where I = 5.5% and t =20 years)
5)	present value of the face amount				(26,600,000*.34273)		9116618
	PV of the semi annual interest payment				(1,330,000*11.95038)		15894005
	price received for the bonds						25010623