On January 1, the first day of its fiscal year, Pretender Company issued $18,500
ID: 2437337 • Letter: O
Question
On January 1, the first day of its fiscal year, Pretender Company issued $18,500,000 of five-year, 10% 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 12%, resulting in Pretender Company receiving cash of $17,138,298.
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 $17,138,298 rather than for the face amount of $18,500,000.Explanation / Answer
Amort Chart Date Cash Interest Interest Discount Unamortized Carrying Expense Amortized Discount Value of Bonds 01.01. Yr1 1361702 17138298 30.06. Yr1 925000 1028298 103298 1258404 17241596 31.12.Yr 1 925000 1034496 109496 1148908 17351092 Journal entries: Date Accounts title and explanations Debit $ Credit $ 01.01. Yr1 Cash account Dr. 17138298 Discount on Bonds payable Dr. 1361702 Bonds payable 18500000 30.06.Yr1 Interest expense Dr. 1028298 Cash account 925000 Discount on bonds payable 103298 31.12. Yr1 Interest expense Dr. 1034496 Cash account 925000 Discount on bonds payable 109496 Req b: Interest expense for the first year: June30: 1028298 Dec31 : 1034496 Interest expense for the first year: 2062794 Req C: The Market rate of interest is higher than stated rate of interest i.e. investors get lesser income as compared to market rate. Therefore, they will be willing to invest in the bonds only when issued at a price lesser than par value. hence, these are issued at discount.