On July 1, Year 1, Danzer Industries Inc. issued $48,800,000 of 10-year, 9% bond

Question

On July 1, Year 1, 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, 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?

Explanation / Answer

**Number of semiannual months :10*2=20

Amortisation of discount per semiannual month = 5,831,742 /20 = 291587.1 [rounded to 291587]

3)Interest expense for year 1 : $ 2,487,587

4)The bonds will be trading at discount when the coupon rate is less than market rate

The statement is True.

Date Account Debit credit July 1 cash 42,968,258 Discount on bond payable 5,831,742 Bond payable 48,800,000 [Being bond issued at discount] 2a)31december Interest expense 2,487,587 Discount on bond payable 291,587 cash [48800000*.09*6/12] 2,196,000 [being first semiannual interest paid] b)30 Interest expense 2,487,587 Discount on bond payable 291,587 cash 2,196,000

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