Question

Bond Discount, Entries for Bonds Payable Transactions

On July 1, Year 1, Danzer Industries Inc. issued $2,500,000 of 5-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $2,403,470. 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

Feedback

Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.

The straight-line method of amortization provides equal amounts of amortization over the life of the bond.

Learning Objective 2.

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

Feedback

Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.

The straight-line method of amortization provides equal amounts of amortization over the life of the bond.

Learning Objective 2.

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

Feedback

Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.

The straight-line method of amortization provides equal amounts of amortization over the life of the bond.

Learning Objective 2.

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?

Yes

5. Compute the price of $2,403,470 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

Solution 1:

Journal Entries - Danzer Industries Inc.
Date	Particulars	Debit	Credit
July 1, Year 1	Cash Dr	$2,403,470.00
	Discount on bond payable Dr	$96,530.00
	To Bonds payable		$2,500,000.00
	(To record issue of bond at discount)

Solution 2:

Journal Entries - Danzer Industries Inc.
Date	Particulars	Debit	Credit
Dec 31, Year 1	Interest Expense Dr	$122,153.00
	To Discount on bond payable ($96,530/10)		$9,653.00
	To Cash ($2,500,000*4.5%)		$112,500.00
	(Being first semiannual interest payment made and discount amortized)
June 30, Year 2	Interest Expense Dr	$122,153.00
	To Discount on bond payable ($96,530/10)		$9,653.00
	To Cash ($2,500,000*4.5%)		$112,500.00
	(Being 2nd semiannual interest payment made and discount amortized)

Solution 3:

Bond interest expense for year 1 = $122,153 + $122,153 = $244,306

Solution 4:

Yes, bond proceeds always be less than the face amount of the bonds when the contract rate is less than the market rate of interest

Solution 5:

Computation of bond price
Table values are based on:
n=	16
i=	5%
Cash flow	Table Value	Amount	Present Value
Present value of face amount	0.61391	$2,500,000	$1,534,775
Present value of semi annual interest payments	7.72173	$112,500	$868,695
Price received for the bonds			$2,403,470