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On January 1, the first improvement products.Interest $17,138,298 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 is payable semiannually. The bonds were issued at a market (effective) interest rate of 12%, resulting in Pretender Company receiving cash or 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 yousr answer to the nearest dolar.) 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
Expert Answer
Face Value of Bonds = $18,500,000
Proceed from Issue = $17,138,298
Annual Coupon Rate = 10%
Semi-annual Coupon Rate = 5%
Semi-annual Coupon = 5%*$18,500,000
Semi-annual Coupon = $925,000
Annual Market Rate = 12%
Semi-annual Market Rate = 6%
June 30:
Interest Expense = 6%*$17,138,298
Interest Expense = $1,028,297.88
Semi-annual Coupon = $925,000
Discount Amortized = $1,028,297.88 – $925,000.00
Discount Amortized = $103,297.88
Carrying Value = $17,138,298 + $103,297.88
Carrying Value = $17,241,595.88
December 31:
Interest Expense = 6%*$17,241,595.88
Interest Expense = $1,034,495.75
Semi-annual Coupon = $925,000
Discount Amortized = $1,034,495.75 – $925,000
Discount Amortized = $109,495.75
Answer A.
Answer B.
Interest Expense for the year = $1,028,297.88 + $1,034,495.75
Interest Expense for the year = $2,062,793.63
