Bond Discount, Entries for Bonds Payable Transactions On July 1, Year 1, Danzer
ID: 2804243 • Letter: B
Question
Bond Discount, Entries for Bonds Payable Transactions
On July 1, Year 1, Danzer Industries Inc. issued $2,000,000 of 5-year, 11% bonds at a market (effective) interest rate of 12%, receiving cash of $1,926,390. 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 $1,926,390 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-Jul
cash
1926390
discount on bonds payable
73610
bonds payable
2000000
31-Dec
interest expense
117361
cash
110000
discount on bonds payable
7361
30-Jun
interest expense
117361
cash
110000
discount on bonds payable
7361
3-
total interest expense of year 1
117361+117361
234722
4-
yes it would always be less than the face value
5-
interest
110000
face value
2000000
PVAF AT 6% FOR 10 SEMIANNUAL PERIOD
1-(1+R)^-N / R
1-(1.06)^-10 / .06
7.36
PVF AT 6% AT 10TH SEMIANNUAL PERIOD
1/(1+R)^N
1/1.06^10
0.558395
VALUE OF BOND
(110000*7.36008)+(2000000*.558395)
1926399
date
explanation
debit
credit
1-Jul
cash
1926390
discount on bonds payable
73610
bonds payable
2000000
31-Dec
interest expense
117361
cash
110000
discount on bonds payable
7361
30-Jun
interest expense
117361
cash
110000
discount on bonds payable
7361
3-
total interest expense of year 1
117361+117361
234722
4-
yes it would always be less than the face value
5-
interest
110000
face value
2000000
PVAF AT 6% FOR 10 SEMIANNUAL PERIOD
1-(1+R)^-N / R
1-(1.06)^-10 / .06
7.36
PVF AT 6% AT 10TH SEMIANNUAL PERIOD
1/(1+R)^N
1/1.06^10
0.558395
VALUE OF BOND
(110000*7.36008)+(2000000*.558395)
1926399