On July 1, Year 1, Danzer Industries Inc. issued $40,000,000 of 10-year, 7% bond
ID: 2584432 • Letter: O
Question
On July 1, Year 1, Danzer Industries Inc. issued $40,000,000 of 10-year, 7% bonds at a market (effective) interest rate of 8%, receiving cash of $37,282,062. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
Required:
*Refer to the Chart of Accounts for exact wording of account titles.
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1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1. 2. Journalize the entries to record the following:* a. The first semiannual interest payment on December 31, Year 1, and the amortization of the bond discount, using the straight-line method. (Round 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 to the nearest dollar.) 3. Determine the total interest expense for Year 1. 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 $37,282,062 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.
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Explanation / Answer
1) Date Account titles & Explanations Debit Credit 1-Jul cash 37,282,062 discount on bonds payable 2,717,938 Bonds payable 40,000,000 2) Amortization of discount 2,717,938/20 135897 31-Dec interest expense 1535897 discount on bonds 135897 cash (40,000,000*7%*1/2) 1400000 30-Jun interest expense 1535897 discount on bonds 135897 cash (40,000,000*7%*1/2) 1400000 3) total interest for year 1 3071794 4) yes 5) bond issue price where n=4% t = 20 years use PV of $1 table for principal use pv of $1 ordianry annuity table for interest principal 40,000,000*.45639= 18255600 interest 1,400,000*13.59033= 19026462 bonds issue price 37282062
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