On January 1, the first day of its fiscal year, Pretender Company issued $18,500
ID: 2518600 • 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
A) Journal Entries no Accounting titles & Explanations Debit Credit 1) Cash 17,138,298 discount on bonds payable 1,361,702 Bonds payable 18,500,000 2) Interest expense (17138298*6%) 1028298 Discount on bonds 103298 cash (18,500,000*5%) 925000 3) interest expense (17138298+103298)*6% 1034496 discount on bonds 109496 cash 925000 b) bond interest expense for the first year 1,028,298+1,034,496 2062794 c) because the contract rate of 10% is less than the market rate of 12%