Question

Bond Discount, Entries for Bonds Payable Transactions

On July 1, Year 1, Danzer Industries Inc. issued $4,100,000 of 7-year, 9% bonds at a market (effective) interest rate of 11%, receiving cash of $3,706,827. 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 $3,706,827 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
Date	Particulars	Debit	Credit
July 1 Year 1	Cash A/c Dr	$37,06,827
	Discount on Bond Payable Dr	3,93,173
	To bonds payable		$41,00,000
	(Being bond issued at discount)

Solution 2:

(a) Journal Entries - Danzer Industries
Date	Particulars	Debit	Credit
Dec 31, Year 1	Interest Expense Dr	$2,12,584
	To Discount on Bond Payable ($393173/14)		$28,084
	To Cash ($4,100,000*9%*6/12)		$1,84,500
	(To record first payment of Interest and Amortization of discount on issue)
(b) Journal Entries - Danzer Industries
Date	Particulars	Debit	Credit
June 30, Year 2	Interest Expense Dr	$2,12,584
	To Discount on Bond Payable ($393173/14)		$28,084
	To Cash ($4,100,000*9%*6/12)		$1,84,500
	(To record second payment of Interest and Amortization of discount on issue)

Solution 3:

total interest expense for Year 1 = $212,584

Solution 4:

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

Solution 5:

Chart Values are based on:
n= (7 Years*2)	14	Half years
i= (11%/2)	5.50%	Semi annual
Cash Flow	Table Value	*	Amount	=	Present Value
Par (Maturity) Value	0.47257	*	$41,00,000	=	$19,37,537
Interest (Annuity) [$4100000*9%*6/12]	9.58965	*	$1,84,500	=	$17,69,290
Price of Bonds					$37,06,827