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Bond discount, entries for bonds payable transactions, interest method of amortizing bond discount 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. 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 interest method. Round to the nearest dollar. b. The interest payment on June 30, Year 2, and tile amortization of the bond discount, using the interest method. Round to the nearest dollar. 3. Determine the total interest expense for Year 1.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 14, Problem 14.5APR
Textbook Problem

Bond discount, entries for bonds payable transactions, interest method of amortizing bond discount

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.

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 interest method. Round to the nearest dollar.

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

3. Determine the total interest expense for Year 1.

Expert Solution

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.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

1.

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

Explanation of Solution

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...

Expert Solution

2.a.

To determine

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

Expert Solution

b.

To determine

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

Expert Solution

3.

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

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Chapter 14 Solutions

Accounting
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