Bond Discount, Entries for Bonds Payable Transactions On July 1, Year 1, Danzer
ID: 2574492 • Letter: B
Question
Bond Discount, Entries for Bonds Payable Transactions
On July 1, Year 1, Danzer Industries Inc. issued $5,600,000 of 8-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $5,296,534. 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 $5,296,534 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.
Explanation / Answer
date
explanation
debit
credit
1-
1-Jul
cash
5296534
discount on bonds payable
303466
bonds payable
5600000
2-
31-Dec
interest expense
233033.4
discount on bonds payable
18966.63
cash
252000
3-
31-Dec
interest expense
233033.4
discount on bonds payable
18966.63
cash
252000
4-
total interest expense for year 1
233033.4+233033.4
466066.8
5-
True because it is always less than the face value because market interest rate is more than the coupon rate and discounted value of cash inflows will be less than the present value of face value
6-
present value of the face amount
face value/(1+r)^n
5600000/(1.05)^16
2565425
present value of interest payment
Interest*PVAF at 5% for 16 semiannual period
252000*10.837
2731118
price received for the bonds
5296543
PVAF at 5% for 16 semiannual period
1-(1+r)^-n / r
1-(1.05)^-16 /.05
10.83777
date
explanation
debit
credit
1-
1-Jul
cash
5296534
discount on bonds payable
303466
bonds payable
5600000
2-
31-Dec
interest expense
233033.4
discount on bonds payable
18966.63
cash
252000
3-
31-Dec
interest expense
233033.4
discount on bonds payable
18966.63
cash
252000
4-
total interest expense for year 1
233033.4+233033.4
466066.8
5-
True because it is always less than the face value because market interest rate is more than the coupon rate and discounted value of cash inflows will be less than the present value of face value
6-
present value of the face amount
face value/(1+r)^n
5600000/(1.05)^16
2565425
present value of interest payment
Interest*PVAF at 5% for 16 semiannual period
252000*10.837
2731118
price received for the bonds
5296543
PVAF at 5% for 16 semiannual period
1-(1+r)^-n / r
1-(1.05)^-16 /.05
10.83777