Enthes Yor issuing bonds and amortizing discount by straloht Chart of Accounts J
ID: 2485409 • Letter: E
Question
Enthes Yor issuing bonds and amortizing discount by straloht Chart of Accounts Journal Journal Final Questions Instructions On January 1, the first day of its fiscal year, Pretender Company issued 18,400,000 of dve-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): Issuance of the bonds.Explanation / Answer
In the books of Pretender Company:
B. Bond interest expense ( straight -line method ) for the first year is $ 2,466,466
C. Because the coupon rate ( 12%) was lower than the market (effective) rate of interest of 14%. The value of a bond V can be expressed as the present value of the stated interest or coupon payments, discounted at the market required rate of return. Therefore, V = C / ( 1 + r)t, where C is the cash flow from the coupons, and r is the market required rate of return. Since C is in the numerator, and r in the denominator, a C greater than r would lead to a higher than par value issue ( Premium) and a C lower than r would lead to an issue at a discount. If C=r, the issue happens at par.
Date Account Titles Debit Credit $ $ January 1 Cash 17,107,672 Discount on bonds payable 1,292,328 Bonds payable 18,400,000 June 30 Bond interest expense 1,233,233 Cash 1,104,000 Discount on bonds payable 129,233 December 31 Bond interest expense 1,233,233 Cash 1,104,000 Discount on bonds payable 129,233Related Questions
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