Question

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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:

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.

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 2 years ago
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