On January 1, the first day of its fiscal year, Pretender Company issued $25,100
ID: 2482218 • Letter: O
Question
On January 1, the first day of its fiscal year, Pretender Company issued $25,100,000 of five-year, 596 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 7%, resulting in Pretender Company receiving cash of $23,012,565 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.Explanation / Answer
A. Pretender Company
Journal
B. Bond interest expense for the first year is $ 1,617,108
C. The company was able to issue the bonds for only $ 23,012,565 rather than the face amount of $ 25,100,000 because the effective or market rate of interest on identical or similar bonds is higher than the stated or coupon rate. While calculating the value of bonds, The coupon rate is in the numerator, while the market rate or yield is in the denominator. If the coupon rate had been higher than the effective market rate, the bonds would have sold at a premium instead.
Date Account Title Debit Credit $ $ January 1 Cash 23,012,565 Discount on bonds payable 2,087,435 Bonds payable 25,100,000 Issuance of the bonds June 30 Bond interest expense 805,440 Cash 627,500 Discount on bonds payable 177,940 First semi-annual interest payment December 31 Bond interest expense 811,668 Cash 627,500 Discount on bonds payable 184,168 Second semi-annual interest payment