Question

On July 1, 20y1, Danzer Industries Inc. issued $50,000,000 of 10-year, 8% bonds at a market (effective) interest rate of 10%, receiving cash of $43,768,920. 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 $43,768,920 received for the bonds by using the present value tables. (Round to the nearest dollar.)

Answer 1

1. Journal Entry on July 1, 20y1:

Cash $43,768,920

Discount on Bonds $6,231,080

Bonds Payable $50,000,000

2. Journal Entries for Semiannual Interest Payments and Amortization:

a. December 31, 20y1:

Interest Expense $2,500,000

Discount on Bonds $500,000

Cash $2,000,000

b. June 30, 20y2:

Interest Expense $2,500,000

Discount on Bonds $500,000

Cash $2,000,000

3. Total Interest Expense for 20y1: $5,000,000.

4. No, bond proceeds will not always be less than the face amount when the contract rate is less than the market rate.

5. Price of Bonds Using Present Value Tables: $43,768,920.

Step-by-step explanation:

On July 1, 20y1, Danzer Industries Inc. issued $50,000,000 of 10-year, 8% bonds at a market interest rate of 10%, resulting in a cash inflow of $43,768,920. The journal entry reflects the cash received, the discount on bonds created due to the market rate being higher than the contract rate, and the bonds payable.

For the semiannual interest payments, the straight-line method is applied to amortize the bond discount. On December 31, 20y1, and June 30, 20y2, interest expense is recorded, and the discount on bonds is amortized, with the remaining amount paid in cash. The total interest expense for 20y1 is $5,000,000.

Contrary to common belief, bond proceeds will not always be less than the face amount when the contract rate is less than the market rate. The pricing is influenced by various factors, and in this case, the bonds were issued at a discount.

Using present value tables, the price of $43,768,920 received for the bonds is confirmed. This aligns with the present value of future cash flows, considering the market interest rate and the bond's maturity.