On January 1, the first day of its fiscal year, Pretender Company issued $18,500,000 of five-year,...

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:

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.)

Determine the amount of the bond interest expense for the first year.

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.

Solutions

Expert Solution


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.

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

On January 1, the first day of its fiscal year, Pretender Company issued $18,400,000 of five-year,...

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....

On January 1, the first day of its fiscal year, Chin Company issued $10,000,000 of five-year,...

On January 1, the first day of its fiscal year, Chin Company issued $10,000,000 of five-year, 7% 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 8%, resulting in Chin Company receiving cash of $9,594,415. 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....

On January 1, the first day of the fiscal year pretenders company issued $24,200 of five...

On January 1, the first day of the fiscal year pretenders company issued $24,200 of five years, 11% 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 13% resulting in pretender company receiving cash of $22,460,399 A. Journalize the entries to record the following 1. Issuance of the bond 2. First semiannual interest payment. The bond discount is combined with the...

On the first day of its fiscal year, Chin Company issued $16,800,000 of five-year, 4% bonds...

On the first day of its fiscal year, Chin Company issued $16,800,000 of five-year, 4% 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 6%, resulting in Chin Company receiving cash of $15,366,859. a. Journalize the entries to record the following: Issuance of the bonds. First semiannual interest payment. The bond discount amortization, using the straight-line method, is combined with the semiannual...

On the first day of its fiscal year, Ebert Company issued $17,000,000 of 5-year, 10% bonds...

On the first day of its fiscal year, Ebert Company issued $17,000,000 of 5-year, 10% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 11%, resulting in Ebert Company receiving cash of $16,359,296. The company uses the interest method. a. Journalize the entries to record the following: 1. Sale of the bonds. Round amounts to the nearest dollar. For a compound transaction, if an amount box does not require...

Amortize Discount by Interest Method On the first day of its fiscal year, Ebert Company issued...

Amortize Discount by Interest Method On the first day of its fiscal year, Ebert Company issued $50,000,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert Company receiving cash of $43,495,895. The company uses the interest method. b. Compute the amount of the bond interest expense for the first year. Round amounts to the nearest dollar.

Amortize Discount by Interest Method On the first day of its fiscal year, Ebert Company issued...

Amortize Discount by Interest Method On the first day of its fiscal year, Ebert Company issued $18,000,000 of 5-year, 10% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 12%, resulting in Ebert Company receiving cash of $16,675,281. The company uses the interest method. a. Journalize the entries to record the following: 1. Sale of the bonds. Round amounts to the nearest dollar. For a compound transaction, if an...

On January 1, 2020 (the first day of its fiscal year) Vaughn Ltd. acquired a patent...

On January 1, 2020 (the first day of its fiscal year) Vaughn Ltd. acquired a patent which gave the company the right to use a production process. The process met the six criteria for capitalization as an intangible asset. Below is a listing of the events relating to the patent over the five fiscal years from 2020 through 2024: 2020: ● on January 1, acquired the patent for the production process from its inventory for a cash payment of $12,800,000,...

On January 1, 2020 (the first day of its fiscal year) Wildhorse Ltd. acquired a patent...

On January 1, 2020 (the first day of its fiscal year) Wildhorse Ltd. acquired a patent which gave the company the right to use a production process. The process met the six criteria for capitalization as an intangible asset. Below is a listing of the events relating to the patent over the five fiscal years from 2020 through 2024: 2020: ● on January 1, acquired the patent for the production process from its inventory for a cash payment of $17,400,000,...

On January 1, 2017, the first day of its fiscal year, Carter City received notification that...

On January 1, 2017, the first day of its fiscal year, Carter City received notification that a federal grant in the amount of $580,000 was approved. The grant was restricted for the payment of wages to teenagers for summer employment. The terms of the grant permitted reimbursement only after qualified expenditures have been made; the grant could be used over a two-year period. The following data pertain to operations of the SUMMER EMPLOYMENT GRANT FUND, a special revenue fund of...

Subjects