Question

Bond Discount, Entries for Bonds Payable Transactions

On July 1, Year 1, Danzer Industries Inc. issued $6,700,000 of 8-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $6,336,925. 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. If an amount box does not require an entry, leave it blank.

2. Journalize the entries to record the following: If an amount box does not require an entry, leave it blank.

a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method. (Round your answer 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 your answer to the nearest dollar.)

3. Determine the total interest expense for Year 1. Round to the nearest dollar.
$

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 $6,336,925 received for the bonds by using Exhibit 5 and Exhibit 7. (Round you PV values to 5 decimal places and the final answers to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.

Present value of the face amount	$
Present value of the semi-annual interest payments	$
Price received for the bonds	$

Answer 1

1.

Date	Accounts Description	Debit	Credit
1-Jul	Cash	6,336,925
	Discount on Issue of Bonds	363,075
	Bond Payable		6,700,000
	(Being bond issued)
31-Dec	Interest Expenses	324,192
	Discount on Issue of Bonds		22,692
	Cash		301,500
	(Being Interest Paid on Bonds)
30-Jun	Interest Expenses	324,192
	Discount on Issue of Bonds		22,692
	Cash		301,500
	(Being Interest Paid on Bonds)

3.

Total Interest expenses for Year 1

324,192

4. Yes if Coupon Rate is Less than Market Rate then Bond will be issued at a discount because we are paying less then Market coupon rate.

5.

Present Value of Face Value	3,069,347
Present Value of Bond Interests	3,267,588
Present Value of Bond Interests	6,336,935

Workings:

Nos.	Cashflows	Discounting Factor	Fair Value
1	301,500.00	0.952381	287,143
2	301,500.00	0.907029	273,469
3	301,500.00	0.863838	260,447
4	301,500.00	0.822702	248,045
5	301,500.00	0.783526	236,233
6	301,500.00	0.746215	224,984
7	301,500.00	0.710681	214,270
8	301,500.00	0.676839	204,067
9	301,500.00	0.644609	194,350
10	301,500.00	0.613913	185,095
11	301,500.00	0.584679	176,281
12	301,500.00	0.556837	167,886
13	301,500.00	0.530321	159,892
14	301,500.00	0.505068	152,278
15	301,500.00	0.481017	145,027
16	301,500.00	0.458112	138,121
16	6,700,000.00	0.458112	3,069,347
	Present Value of Bond Interests		3,267,588
	Present Value of Face Value		3,069,347