On January 1, the first day of its fiscal year, Pretender Company issued $18,400

Question

On January 1, the first day of its fiscal year, Pretender Company issued $18,400,000 of five-year, 8% bonds to finance its operations of producing and selling home improvement products. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Pretender Company receiving cash of $17,672,074. Required: A. Journalize the entries to record the following (refer to the Chart of Accounts for exact wording of account titles): 1. Issuance of the bonds. 2. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.) 3. Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.) B. Determine the amount of the bond interest expense for the first year. C. Explain why the company was able to issue the bonds for only $17,672,074 rather than for the face amount of $18,400,000.

Explanation / Answer

The bond is issued at discount because A bond is considered issued at discount when it has a lower interest rate than the current market rate, and consequently is sold at a lower price. It is sold less than par value.

A B C D E F G               $ Date Interest Payment @4% Interest expenses at 4.5%*G Amortization of Bond C-B cr, balance in the a/c Bond Discount a/c Credit balance in the Bond payable Carrying value of Bond F-E Credit cash Debit Interest Expense Bond Discount 1-Jan 727926 18400000 17672074 30-Jun 736000 795243 59243 668683 18400000 17731317 Dec,31 736000 797909 61909 606773 18400000 17793227 Total Interst expense 1593153 Ans B Ans A DR Cr   in $ 1-Jan Cash 17672074 Discount on Bond Payable 727926 Bond Payable 18400000 Issue of bond 30 th June Interest expense 795243 Cash 736000 Discount on Bond payable 59243 31st Dec Interest expense 797909 Cash 736000 Discount on Bond payable 61909

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