Question

On July 1, 20Y1, Danzer Industries Inc. issued $37,400,000 of 10-year, 8% bonds at a market (effective) interest rate of 10%, receiving cash of $32,739,152. 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, 20Y1.*
2.	Journalize the entries to record the following:* a. The first semiannual interest payment on December 31, 20Y1, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.) b. The interest payment on June 30, 20Y2, and the amortization of the bond discount, using the straight-line method. (Round to the nearest dollar.)
3.	Determine the total interest expense for 20Y1.
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 $32,739,152 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.

wo present value tables are provided: Present Value of $1 at Compound Interest Due in n Periods and Present Value of Ordinary Annuity of $1 per Period. Use them as directed in the problem requirements.

Present Value of $1 at Compound Interest Due in n Periods
Periods	4.0%	4.5%	5%	5.5%	6%	6.5%	7%
1	0.96154	0.95694	0.95238	0.94787	0.94340	0.93897	0.93458
2	0.92456	0.91573	0.90703	0.89845	0.89000	0.88166	0.87344
3	0.88900	0.87630	0.86384	0.85161	0.83962	0.82785	0.81630
4	0.85480	0.83856	0.82270	0.80722	0.79209	0.77732	0.76290
5	0.82193	0.80245	0.78353	0.76513	0.74726	0.72988	0.71299
6	0.79031	0.76790	0.74622	0.72525	0.70496	0.68533	0.66634
7	0.75992	0.73483	0.71068	0.68744	0.66506	0.64351	0.62275
8	0.73069	0.70319	0.67684	0.65160	0.62741	0.60423	0.58201
9	0.70259	0.67290	0.64461	0.61763	0.59190	0.56735	0.54393
10	0.67556	0.64393	0.61391	0.58543	0.55839	0.53273	0.50835
11	0.64958	0.61620	0.58468	0.55491	0.52679	0.50021	0.47509
12	0.62460	0.58966	0.55684	0.52598	0.49697	0.46968	0.44401
13	0.60057	0.56427	0.53032	0.49856	0.46884	0.44102	0.41496
14	0.57748	0.53997	0.50507	0.47257	0.44230	0.41410	0.38782
15	0.55526	0.51672	0.48102	0.44793	0.41727	0.38883	0.36245
16	0.53391	0.49447	0.45811	0.42458	0.39365	0.36510	0.33873
17	0.51337	0.47318	0.43630	0.40245	0.37136	0.34281	0.31657
18	0.49363	0.45280	0.41552	0.38147	0.35034	0.32189	0.29586
19	0.47464	0.43330	0.39573	0.36158	0.33051	0.30224	0.27651
20	0.45639	0.41464	0.37689	0.34273	0.31180	0.28380	0.25842
21	0.43883	0.39679	0.35894	0.32486	0.29416	0.26648	0.24151
22	0.42196	0.37970	0.34185	0.30793	0.27751	0.25021	0.22571
23	0.40573	0.36335	0.32557	0.29187	0.26180	0.23494	0.21095
24	0.39012	0.34770	0.31007	0.27666	0.24698	0.22060	0.19715
25	0.37512	0.33273	0.29530	0.26223	0.23300	0.20714	0.18425
26	0.36069	0.31840	0.28124	0.24856	0.21981	0.19450	0.17220
27	0.34682	0.30469	0.26785	0.23560	0.20737	0.18263	0.16093
28	0.33348	0.29157	0.25509	0.22332	0.19563	0.17148	0.15040
29	0.32065	0.27902	0.24295	0.21168	0.18456	0.16101	0.14056
30	0.30832	0.26700	0.23138	0.20064	0.17411	0.15119	0.13137
31	0.29646	0.25550	0.22036	0.19018	0.16425	0.14196	0.12277
32	0.28506	0.24450	0.20987	0.18027	0.15496	0.13329	0.11474
33	0.27409	0.23397	0.19987	0.17087	0.14619	0.12516	0.10723
34	0.26355	0.22390	0.19035	0.16196	0.13791	0.11752	0.10022
35	0.25342	0.21425	0.18129	0.15352	0.13011	0.11035	0.09366
40	0.20829	0.17193	0.14205	0.11746	0.09722	0.08054	0.06678
45	0.17120	0.13796	0.11130	0.08988	0.07265	0.05879	0.04761
50	0.14071	0.11071	0.08720	0.06877	0.05429	0.04291	0.03395

Present Value of Ordinary Annuity of $1 per Period
Periods	4.0%	4.5%	5%	5.5%	6%	6.5%	7%
1	0.96154	0.95694	0.95238	0.94787	0.94340	0.93897	0.93458
2	1.88609	1.87267	1.85941	1.84632	1.83339	1.82063	1.80802
3	2.77509	2.74896	2.72325	2.69793	2.67301	2.64848	2.62432
4	3.62990	3.58753	3.54595	3.50515	3.46511	3.42580	3.38721
5	4.45182	4.38998	4.32948	4.27028	4.21236	4.15568	4.10020
6	5.24214	5.15787	5.07569	4.99553	4.91732	4.84101	4.76654
7	6.00205	5.89270	5.78637	5.68297	5.58238	5.48452	5.38929
8	6.73274	6.59589	6.46321	6.33457	6.20979	6.08875	5.97130
9	7.43533	7.26879	7.10782	6.95220	6.80169	6.65610	6.51523
10	8.11090	7.91272	7.72173	7.53763	7.36009	7.18883	7.02358
11	8.76048	8.52892	8.30641	8.09254	7.88687	7.68904	7.49867
12	9.38507	9.11858	8.86325	8.61852	8.38384	8.15873	7.94269
13	9.98565	9.68285	9.39357	9.11708	8.85268	8.59974	8.35765
14	10.56312	10.22283	9.89864	9.58965	9.29498	9.01384	8.74547
15	11.11839	10.73955	10.37966	10.03758	9.71225	9.40267	9.10791
16	11.65230	11.23402	10.83777	10.46216	10.10590	9.76776	9.44665
17	12.16567	11.70719	11.27407	10.86461	10.47726	10.11058	9.76322
18	12.65930	12.15999	11.68959	11.24607	10.82760	10.43247	10.05909
19	13.13394	12.59329	12.08532	11.60765	11.15812	10.73471	10.33560
20	13.59033	13.00794	12.46221	11.95038	11.46992	11.01851	10.59401
21	14.02916	13.40472	12.82115	12.27524	11.76408	11.28498	10.83553
22	14.45112	13.78442	13.16300	12.58317	12.04158	11.53520	11.06124
23	14.85684	14.14777	13.48857	12.87504	12.30338	11.77014	11.27219
24	15.24696	14.49548	13.79864	13.15170	12.55036	11.99074	11.46933
25	15.62208	14.82821	14.09394	13.41393	12.78336	12.19788	11.65358
26	15.98277	15.14661	14.37519	13.66250	13.00317	12.39237	11.82578
27	16.32959	15.45130	14.64303	13.89810	13.21053	12.57500	11.98671
28	16.66306	15.74287	14.89813	14.12142	13.40616	12.74648	12.13711
29	16.98371	16.02189	15.14107	14.33310	13.59072	12.90749	12.27767
30	17.29203	16.28889	15.37245	14.53375	13.76483	13.05868	12.40904
31	17.58849	16.54439	15.59281	14.72393	13.92909	13.20063	12.53181
32	17.87355	16.78889	15.80268	14.90420	14.08404	13.33393	12.64656
33	18.14765	17.02286	16.00255	15.07507	14.23023	13.45909	12.75379
34	18.41120	17.24676	16.19290	15.23703	14.36814	13.57661	12.85401
35	18.66461	17.46101	16.37419	15.39055	14.49825	13.68696	12.94767
40	19.79277	18.40158	17.15909	16.04612	15.04630	14.14553	13.33171
45	20.72004	19.15635	17.77407	16.54773	15.45583	14.48023	13.60552
50	21.48218	19.76201	18.25593	16.93152	15.76186	14.72452	13.80075

3. Determine the total interest expense for 20Y1. Enter amount as a positive number.

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

No

5. Compute the price of $32,739,152 received for the bonds by using the tables shown in Present Value Tables. (Round to the nearest dollar.)

Present value of the face amount
Present value of the semiannual interest payments
Price received for the bonds

Answer 1

Answer:
Face Value of Bonds = $37,400,000
Issue Value of Bonds = $32,739,152

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $37,400,000 - $32,739,152
Discount on Bonds = $4,660,848

Annual Coupon Rate = 8%
Semiannual Coupon Rate = 4%
Semiannual Coupon = 4% * $37,400,000
Semiannual Coupon = $1,496,000

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period
Semiannual Amortization of Discount = $4,660,848 / 20
Semiannual Amortization of Discount = $233,042

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $1,496,000 + $233,042
Semiannual Interest Expense = $1,729,042

Answer 1 and 2.

           

Answer 3.

Interest Expense for 20Y1 = $1,729,042

Answer 4.

Yes. Proceed from issue of bonds will always be less than the face amount when the contract rate is less than the market rate of interest.

Answer 5.

Annual Interest Rate = 10.00%
Semiannual Interest Rate = 5.00%

Present Value of Face Amount = $37,400,000 * PV of $1 (5.00%, 20)
Present Value of Face Amount = $37,400,000 * 0.37689
Present Value of Face Amount = $14,095,686

Present Value of Semiannual Interest Payments = $1,496,000 * PVA of $1 (5.00%, 20)
Present Value of Semiannual Interest Payments = $1,496,000 * 12.46221
Present Value of Semiannual Interest Payments = $18,643,466

Price Received for the Bonds = Present Value of Face Amount + Present Value of Semiannual Interest Payments
Price Received for the Bonds = $14,095,686 + $18,643,466
Price Received for the Bonds = $32,739,152