Question

Bond Discount, Entries for Bonds Payable Transactions

On July 1, Year 1, Danzer Industries Inc. issued $6,900,000 of 7-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $6,569,162. 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.

	Cash
	Discount on Bonds Payable
	Bonds Payable

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.)

	Interest Expense
	Discount on Bonds Payable
	Cash

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.)

	Interest Expense
	Discount on Bonds Payable
	Cash

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 $6,569,162 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

Date	accounts Title	Dr	Cr
1-Jul	Cash	$6,569,162
	Discount on Bonds Payable	$330,838
	Bonds Payable		$6,900,000
(being issue of bonds at discount)
a) Dec 31	Interest Expense (6569162*5.5%)	$361,304
Year 1	Discount on Bonds Payable (bal fig)		$16,304
	Cash (6900000*5%)		345000
b)
June 30 Year 2	Interest Expense (6569162-16304)*5.5%	360407
	Discount on Bonds Payable (bal fig)		$15,407
	Cash (6900000*5%)		345000
Ans 3
Total interest expense for Year 1 $361304
Ans 4 Yes when the coupon rate is less than market rate than bonds are always issued at disount
so the proceeds ill be always less thn the par value
Ans 5
	Present value of the face amount	3260733
	6900000/(1.055)^14
	6900000*.47257
	Present value of the semi-annual interest payments	3308425
	345000*(1-(1.055)^-14)/.055)
	(345000*(1-.47257)/.055)
	Price received for the bonds	6569158