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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Bond discount, entries for bonds payable transaction

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.

Instructions

1. Journalize the entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year I.

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. (Appendix 1) Compute the price of $37,282,062 received for the bonds by using the present value tables in Appendix A at the end of the text. Round to the nearest dollar.

1.

To determine

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Straight-line amortization method: It is a method of bond amortization that spreads the amount of the bond discount equally over the interest period.

To prepare: Journal entry to record the amount of cash proceeds from the issuance of the bonds on July 1, Year 1.

Explanation

Prepare journal entry for cash proceeds from the issuance of the bonds on July 1, Year 1.

Date Account Title and Explanation Post Ref Debit ($) Credit ($)
July 1, Year 1 Cash  37,282,062
Discount on Bonds Payable  (1) 2,717,938
Bonds Payable 40,000,000
(To record issuance of bonds payable at discount)

Table (1)

Working note:

Calculate discount on bonds payable...

2(a)

To determine

To prepare: Journal entry to record first interest payment and amortization of bond discount on December 31, Year 1.

(b)

To determine

To prepare: Journal entry to record second interest payment and amortization of bond discount on June 30, Year 2.

3.

To determine
The amount of total interest expense for Year 1.

4.

To determine

To explain: The situation when contract rate of bond is less than the market rate of interest.

5.

To determine

To calculate: The amount of cash proceeds (present value) from the sale of the bonds using present value tables.

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