On July 1, Year 1, Danzer Industries Inc. issued $2,200,000 of 9-year, 10% bonds at a market (effective) interest rate of 11%, receiving cash of $2,076,302. Interest on the bonds is payable semiannually on December 31 and June 30. The fiscal year of the company is the calendar year.
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 $2,076,302 received for the bonds by using Exhibit 5 and Exhibit 7. (Round you PV values to 5 decimal places and the final answers to the nearest dollar.) Your total may vary slightly from the price given due to rounding differences.
|Present value of the face amount||$|
|Present value of the semi-annual interest payments||$|
|Price received for the bonds||$|
Face Value = $2,200,000
Proceed from Issue = $2,076,302
Discount on Issue = Face Value - Proceed from Issue
Discount on Issue = $2,200,000 - $2,076,302
Discount on Issue = $123,698
Semiannual Cash Payment = Face Value * Annual Stated Rate *
Semiannual Cash Payment =$2,200,000 * 10% * 1/2
Semiannual Cash Payment = $110,000
Semiannual Amortization of Discount = Discount on Bonds /
Semiannual Period to Maturity
Semiannual Amortization of Discount = $123,698 / 18
Semiannual Amortization of Discount = $6,872
Semiannual Interest Expense = Semiannual Cash Payment +
Semiannual Amortization of Discount
Semiannual Interest Expense = $110,000 + $6,872
Semiannual Interest Expense = $116,872
Interest Expense for Year 1 = $116,872
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