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

Face Value of Bonds = $40,000,000
Issue Value of Bonds = $37,282,062

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $40,000,000 - $37,282,062
Discount on Bonds = $2,717,938

Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50% * $40,000,000
Semiannual Coupon = $1,400,000

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period
Semiannual Amortization of Discount = $2,717,938 / 20
Semiannual Amortization of Discount = $135,897

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $1,400,000 + $135,897
Semiannual Interest Expense = $1,535,897

Answer 1 and 2.

Answer 3.

Interest Expense for Year 1 = $1,535,897

Answer 4.

Yes. Proceed from issue of bonds will always be less than the face amount when the contract rate is less than the market rate of interest.

Answer 5.

Annual Interest Rate = 8.00%
Semiannual Interest Rate = 4.00%

Present Value of Face Amount = $40,000,000 * PV of $1 (4.00%, 20)
Present Value of Face Amount = $40,000,000 * 0.45639
Present Value of Face Amount = $18,255,600

Present Value of Semiannual Interest Payments = $1,400,000 * PVA of $1 (4.00%, 20)
Present Value of Semiannual Interest Payments = $1,400,000 * 13.59033
Present Value of Semiannual Interest Payments = $19,026,462

Price Received for the Bonds = Present Value of Face Amount + Present Value of Semiannual Interest Payments
Price Received for the Bonds = $18,255,600 + $19,026,462
Price Received for the Bonds = $37,282,062