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.

Answer 1

In straight line amortization, the premium received or discount given on issue of bond is amortized over the bond period maturity on straight line basis. Formula is (Discount / Premium Amount) divided by bond period Face Value $40,000,000 Rate 7% Maturity 10 Period (10 x 2] 20 Issue Proceeds $37,282,062 Discount ($40000000-$37282062] $2,717,938 Interest Payment ($40000000 x 7%/2] $1,400,000 Straight Line Amortisation ($2717938/(20)] $135,897 Credit Debit $37,282,062 $2,717,938 $40,000,000 $1,535,897 Sr.No Date Account Title 1 Jul 1, Year 1 Cash Discount on Bond Payable Bond Payable 2- a Dec 31, Year 1 Interest Expense Discount on Bond Payable Cash 2-b Jun 30, Year 2 Interest Expense Discount on Bond Payable Interest Payable $135,897 $1,400,000 $1,535,897 $135,897 $1,400,000 3 Interest expense for Year 1 $1,535,897