Question
In: Accounting
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):
|
||||||
| 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. |
Solutions
Expert Solution
| Date | General Journal | Debit | Credit |
| A 1 | Cash | 17,107,672 | |
| Discount on bonds payable | 1,292,328 | ||
| Bonds Payable | 18,400,000 | ||
| 2 | Debit Bond Interest Expense | 1,104,000 | |
| Cash | 1,104,000 | ||
| (18,400,000 *12%*6/12) | |||
| 3 | Bond Interest Expense | 1,233,233 | |
| Discount on Bonds Payable (1292328/10) |
129,233 | ||
| Cash | 1,104,000 | ||
| B | the amount of the bond interest expense for the first year. | ||
| (1104000+1233233) | |||
| 2,337,233 | |||
| C | Since market rate was 14%, and coupon rate was only 12%, bonds sold at a discount in order to give the investor a 14% return | ||
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