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.

Instructions

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.Compute the price of $37,282,062 received for the bonds by using the present value tables in Appendix A.

Present value of $1 for 20 semiannual periods at 4.0% semiannual rate	Answer:______
Face amount of bonds	Answer:______
Present value of bond face amount	Answer:______

Present value of an annuity of $1 for 20 periods at 4.0%	Answer:______
Semiannual interest payment	Answer:______
Present value of semiannual interest payment	Answer:______

Total present value of the bond (proceeds)

Answer:______

Appendix A

Present Value of $1 at Compound Interest Due in n Periods
Periods	4.0%	4.5%	5%	5.5%	6%	6.5%	7%
1	0.96154	0.95694	0.95238	0.94787	0.94340	0.93897	0.93458
2	0.92456	0.91573	0.90703	0.89845	0.89000	0.88166	0.87344
3	0.88900	0.87630	0.86384	0.85161	0.83962	0.82785	0.81630
4	0.85480	0.83856	0.82270	0.80722	0.79209	0.77732	0.76290
5	0.82193	0.80245	0.78353	0.76513	0.74726	0.72988	0.71299
6	0.79031	0.76790	0.74622	0.72525	0.70496	0.68533	0.66634
7	0.75992	0.73483	0.71068	0.68744	0.66506	0.64351	0.62275
8	0.73069	0.70319	0.67684	0.65160	0.62741	0.60423	0.58201
9	0.70259	0.67290	0.64461	0.61763	0.59190	0.56735	0.54393
10	0.67556	0.64393	0.61391	0.58543	0.55839	0.53273	0.50835
11	0.64958	0.61620	0.58468	0.55491	0.52679	0.50021	0.47509
12	0.62460	0.58966	0.55684	0.52598	0.49697	0.46968	0.44401
13	0.60057	0.56427	0.53032	0.49856	0.46884	0.44102	0.41496
14	0.57748	0.53997	0.50507	0.47257	0.44230	0.41410	0.38782
15	0.55526	0.51672	0.48102	0.44793	0.41727	0.38883	0.36245
16	0.53391	0.49447	0.45811	0.42458	0.39365	0.36510	0.33873
17	0.51337	0.47318	0.43630	0.40245	0.37136	0.34281	0.31657
18	0.49363	0.45280	0.41552	0.38147	0.35034	0.32189	0.29586
19	0.47464	0.43330	0.39573	0.36158	0.33051	0.30224	0.27651
20	0.45639	0.41464	0.37689	0.34273	0.31180	0.28380	0.25842

Answer 1

1)
Date	Account Titles & Explanation	Debit	Credit
Jul-01	Cash	$       3,72,82,062.00
	Discount on Bonds payable	$          27,17,938.00
	Bonds Payable		$ 4,00,00,000.00
	To record the amount of cash proceeds from the issuance of the bonds
2)
Date	Account Titles & Explanation	Debit	Credit
Dec-31	Interest expenses	$          15,35,896.90
	Discount on Bonds Payable = 2717938/20		$      1,35,896.90
	Cash (40,000,000 x 7%/2)		$    14,00,000.00
Jun-30	Interest expenses	$          15,35,896.90
	Discount on Bonds Payable = 2717938/20		$      1,35,896.90
	Cash (40,000,000 x 7%/2)		$    14,00,000.00
3)
Total Interest Expense for Year 1	$                                                                  15,35,896.90
4)
Present value of $1 for 20 semiannual periods at 4.0% semiannual rate	0.45639
Face amount of bonds	$                                                               4,00,00,000.00
Present value of bond face amount		$ 1,82,55,600.00000
Present value of an annuity of $1 for 20 periods at 4.0%	13.5903
Semiannual interest payment	$                                                                  14,00,000.00
Present value of semiannual interest payment		$       1,90,26,420.00
Total present value of the bond (proceeds)		$ 3,72,82,020.00000
Difference is due to rounding