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.b. The interest payment on June 30, Year 2, and the amortization of the bond discount, using the interest method. (Round to the nearest dollar.)

Answer 1

$40,000,000 x 7% = $2,800,000

effective interest rate = 8%

cash received = $37,282,062

December 31, Year 1, first coupon payment:

($37,282,062 x 8%) - ($40,000,000 x 7%) = $2,982,565 - $2,800,000 = $182,565

June 30, Year 2, second coupon payment:

[($37,282,062 + $182,565) x 8%] - $2,800,000 = $2,997,170 - $2,800,000 = $197,170

The journal entries should be as follows:

July 1, Year 1, bonds are issued at a discount:

Dr Cash 37,282,062

Dr Discount on bonds payable 2,717,938

Cr Bonds payable 40,000,000

December 31, Year 1, first coupon payment:

Dr Interest expense 2,982,565

Cr Discount on bonds payable 182,565

Cr Cash 2,800,000

June 30, Year 2, second coupon payment:

Dr Interest expense 2,997,170

Cr Discount on bonds payable 197,170

Cr Cash 2,800,000