On January 1, the first day of its fiscal year, Pretender Company issued $12,700,000 of five-year, 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 $11,787,069 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 $12,787,069 rather than for the face amount of $12,700,000.

Question

Elliot Matthews

Business

27 May, 19:41

On January 1, the first day of its fiscal year, Pretender Company issued $12,700,000 of five-year, 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 $11,787,069 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 $12,787,069 rather than for the face amount of $12,700,000.

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Answers (1)

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Simone Wu · Answer 1

1) Debit Bank $11787069 Debit bond discount $912931; Credit Bond $12700000

2) Debit Interest expense $751293; Credit Bank $660,000 Credit Discount on Bond payable $91293

3) Debit interest expense $ 751293; Credit bank 660000, Credit discount on bond payable $91293

b) Interest expense = $1502586

c) It is because a financial crisis might have happened prior to issuing the bond and the company still went ahead with issuing even though the rate has changed.

Explanation:

interest expense = 12000000 * 0.11 * 6/12=$660000

discount on bond payable = $912931 / 5 = 182586 / 2 = 91293

Interest expense = $751293 * 2 = $1502586