Question

On July 1, Year 1, Danzer Industries Inc. issued $48,800,000 of 10-year, 9% bonds at a market (effective) interest rate of 11%, receiving cash of $42,968,258. 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 $42,968,258 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	General Journal	Debit	Credit
1	July 1, Year 1	Cash	42968258
		Discount on bonds payable	5831742
		Bonds payable		48800000
		(To record issuance of bonds)
2a.	Dec. 31, Year 1	Interest expense	2487587
		Discount on bonds payable ($5831742/20)		291587
		Cash ($48800000 x 9% x 6/12)		2196000
		(To record interest payment and amortization of discount)
b.	June 30, Year 2	Interest expense	2487587
		Discount on bonds payable ($5831742/20)		291587
		Cash ($48800000 x 9% x 6/12)		2196000
		(To record interest payment and amortization of discount)

Note: Please confirm exact wording of account titles per chart of accounts since the same is not provided with the question.

3. Total interest expense for Year 1: $2487587

4. Yes. When the contract rate of interest on the bonds is less than the market rate of interest, the bonds will be less attractive to investors making them priced lower than the face value.

5.

Cash Flow	Table Value	Present Value
$48,800,000 par (maturity) value	0.34273	16725224
$2,196,000 interest payment*	11.95038	26243034
Price of Bond		42968258

*Interest payment = $48,800,000 x 9% x 1/2 = $2196000

PV factor (i=5.5%, n=20): 0.34273

PVA factor (i=5.5%, n=20): 11.95038