On January 1, the first day of its fiscal year, Ebert Company issued $76,500,000
ID: 2336322 • Letter: O
Question
On January 1, the first day of its fiscal year, Ebert Company issued $76,500,000 of 10-year, 4% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 5%, resulting in Ebert Company receiving cash of $70,537,070. The company uses the interest method. Required: A. Journalize the entries to record the following transactions. Refer to the Chart of Accounts for exact wording of account titles. 1. Sale of the bonds. 2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. 3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. B. Compute the amount of the bond interest expense for the first year. C. Explain why the company was able to issue the bonds for only $70,537,070 rather than for the face amount of $76,500,000.On January 1, the first day of its fiscal year, Ebert Company issued $76,500,000 of 10-year, 4% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 5%, resulting in Ebert Company receiving cash of $70,537,070. The company uses the interest method. Required: A. Journalize the entries to record the following transactions. Refer to the Chart of Accounts for exact wording of account titles. 1. Sale of the bonds. 2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. 3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. B. Compute the amount of the bond interest expense for the first year. C. Explain why the company was able to issue the bonds for only $70,537,070 rather than for the face amount of $76,500,000.
On January 1, the first day of its fiscal year, Ebert Company issued $76,500,000 of 10-year, 4% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 5%, resulting in Ebert Company receiving cash of $70,537,070. The company uses the interest method. Required: A. Journalize the entries to record the following transactions. Refer to the Chart of Accounts for exact wording of account titles. 1. Sale of the bonds. 2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. 3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. B. Compute the amount of the bond interest expense for the first year. C. Explain why the company was able to issue the bonds for only $70,537,070 rather than for the face amount of $76,500,000.
Explanation / Answer
1)Cash (db) 70537070
discount on bonds payable (db) 5962930
bonds payable (cr) 76500000
2)interest on jun 30:
Interest expense (db) ((5%/2)%*(70537070)=1763427
discount on bonds payable (cr) 2334267
Cash (cr) =(4%/2)*76500000=1530000
3)interest on Dec 31:
Interest expense (db) (5%/2)%*(70770496.75)=1769262
discount on bonds payable (cr) 239262
Cash (cr) =(4%/2)*76500000=1530000
b)bond interest expense=1763427+1769262=3532689
c)since the market interest rate is higher than bond coupon rate the bond is issued at discount so the amount is lesser than face value