Question

On July 1, Year 1, Danzer Industries Inc. issued $4,200,000 of 7-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $3,992,137. 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 $3,992,137 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)

Date	Account titles and explanation	Debit	Credit
Year 1
July 1	Cash	$3992137
	Discount on Bonds Payable (4200000-$3992137)	$207863
	Bonds Payable		$4200000
	(To record bonds issued at discount)

2-a)

Date	Account titles and explanation	Debit	Credit
Year 1
Dec 31	Interest expense (14847+189000)	$203847
	Cash (4200000*9%*6/12)		$189000
	Discount on bonds payable		$14847
	(To record interest paid and amortization of the bond discount)

Discount on bonds payable= $207863/(7*2)= $14847

2-b)

Date	Account titles and explanation	Debit	Credit
Year 2
June 30	Interest expense (14847+189000)	$203847
	Cash (4200000*9%*6/12)		$189000
	Discount on bonds payable		$14847
	(To record interest paid and amortization of the bond discount)

3) Total interest expense for Year 1= $203847

4) When the contract rate is less than the market rate of interest that means the bonds are issued at discount and the face value of the bonds is more than the issue price.

So, the statement is Yes, 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) Semi-annual interest= $4200000*9%*6/12= $189000

Present value of the face amount (4200000*0.50507)	$2121294
Present value of the semi-annual interest payments (189000*9.89864)	1870843
Price received for the bonds	$3992137