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 tables shown in Present Value Tables. (Round to the nearest dollar.)

*Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

Answer 2.

Face Value of Bonds = $40,000,000
Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.5%
Semiannual Coupon = 3.5%*$40,000,000 = $1,400,000

Discount on Bonds Payable = $2,717,938

Number of Semiannual Coupon Payments = 20

Semiannual Amortization of Discount = Discount on Bonds Payable / Number of Semiannual Coupon Payments
Semiannual Amortization of Discount = $2,717,938 / 20
Semiannual Amortization of Discount = $135,897

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

Answer 3.

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

Answer 4.

Yes, Proceed from issue of bonds will always less than face value if contract rate is less than the market rate of interest.

Answer 5.

Face Value of Bonds = $40,000,000
Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.5%
Semiannual Coupon = 3.5%*$40,000,000 = $1,400,000
Number of Semiannual Coupon Payments = 20
Annual Market Interest Rate = 8%
Semiannual Market Interest Rate = 4%

Proceed from Issue of Bonds = $1,400,000 * PVIFA(4%, 20) + $40,000,000 * PVIF(4%, 20)
Proceed from Issue of Bonds = $1,400,000 * 13.59033 + $40,000,000 * 0.45639
Proceed from Issue of Bonds = $37,282,062