Question

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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. 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.

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

ekkarill92 answered 2 years ago
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