Question

Instructions On July 1, 20Y1, Danzer Industries Inc. issued $48,800,000 of 10-year, 9% bonds at a market (effective) interest rate of 11%, receiving cash of $42,968,258. 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 $42,968,258 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. Present Value Tables

Answer 1

Solution 1:

Journal Entries - Danzer Industries Inc.
Date	Particulars	Debit	Credit
July 1, Year 1	Cash Dr	$42,968,258.00
	Discount on bond payable Dr	$5,831,742.00
	To Bonds payable		$48,800,000.00
	(To record issue of bond at discount)

Solution 2:

Journal Entries - Danzer Industries Inc.
Date	Particulars	Debit	Credit
Dec 31, Year 1	Interest Expense Dr	$2,487,587.00
	To Discount on bond payable ($5,831,742/20)		$291,587.00
	To Cash ($48,800,000*4.5%)		$2,196,000.00
	(Being first semiannual interest payment made and discount amortized)
June 30, Year 2	Interest Expense Dr	$2,487,587.00
	To Discount on bond payable ($5,831,742/20)		$291,587.00
	To Cash ($48,800,000*4.5%)		$2,196,000.00
	(Being 2nd semiannual interest payment made and discount amortized)

Solution 3:

Total interest expense for 20Y1 = $2,487,587

Solution 4:

Yes, bonds proceeds will always be less than face amount if contract rate is lesser than market interest rate.

Solution 5:

Table values are based on:
n=	20
i=	6%
Cash flow	Table Value	Amount	Present Value
Present value of face amount	0.34273	$48,800,000	$16,725,224
Present value of semi annual interest payments	11.95038	$2,196,000	$26,243,034
Price received for the bonds			$42,968,258