Question

Bond Discount, Entries for Bonds Payable Transactions

On July 1, Year 1, Danzer Industries Inc. issued $2,300,000 of 9-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $2,170,679. 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 $2,170,679 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

1) The journal entry to record issuance of bonds is shown as follows:-

Journal Entries (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
July 1, year 1	Cash	2,170,679
	Discount on Bonds Payable (2,300,000-2,170,679)	129,321
	Bonds Payable		2,300,000
	(To record the issue of bonds payable)

2) Total no. of semiannual periods = 9 years*2 periods = 18 periods

Discount to be amortized each period = $129,321/18 periods = $7,185 (rounded off)

Journal Entries (Amounts in $)

No	Date	Account Titles and Explanations	Debit	Credit
a)	Dec 31, year 1	Interest Expense (bal fig) (230,000+7,185)	237,185
		Discount on Bonds Payable		7,185
		Cash ($2,300,000*10%)		230,000
		(To record the interest expense on bonds)
b)	Jun 30, year 2	Interest Expense (bal fig) (230,000+7,185)	237,185
		Discount on Bonds Payable		7,185
		Cash ($2,300,000*10%)		230,000
		(To record the interest expense on bonds)

3) Total interest expense for year 1 = $237,185

4) The current price of bonds is equal to present value of all bond payments during the bond life discounted at market rate of interest. Therefore 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.