On January 1, the first day of its fiscal year, Pretender Company issued $18,400
ID: 2544464 • Letter: O
Question
On January 1, the first day of its fiscal year, Pretender Company issued $18,400,000 of five-year, 12% 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 14%, resulting in Pretender Company receiving cash of $17,107,672.
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 $17,107,672 rather than for the face amount of $18,400,000.
Explanation / Answer
SOLUTION
A. Journal Entries-
B. Interest Expense for first year = $1,233,233 + $1,233,233 = $2,466,466
C. The bonds were issued at a discount because the stated rate on the bonds (12%) is less than the market rate (14%).
S.No. Account titles and Explanation Debit ($) Credit ($) 1. Cash 17,107,672 Discount on Bonds Payable 1,292,328 Bonds Payable 18,400,000 (To record issuance of bonds) 2. Interest Expense 1,233,233 Discount on Bonds Payable ($1,292,328 / 10) 129,233 Cash ($18,400,000 * 12%*1/2) 1,104,000 (To record First semiannual interest payment ) 3. Interest Expense 1,233,233 Discount on Bonds Payable ($1,292,328 / 10) 129,233 Cash ($18,400,000 * 12%*1/2) 1,104,000 (To record second semiannual interest payment )