entries issuing bonds and amortizing discount by straight line method EX 12-6 En

Question

entries issuing bonds and amortizing discount by straight line method EX 12-6 Entries for issuing bonds and amortizing discount by straight-line method OBJ.2,3 On the first 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 improvement products. Interest is payable semiannually. The bonds were issued at a market (effective) interest rte of 12%, resulting in Pretender Company receiving cash of $17,138,298. a. Journalize the entries to record the following: 1. Issuance of the bonds. 2. First semiannu al 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 $17,138,298 rather than for the face amount of $18,500,000.

Explanation / Answer

Requirement a:

1) Issuance of bonds:

Cash a/c Dr $17138298

Discount on issue of bonds Dr $1361702

To Bonds payable $18500000

2) First Semiannual Interest payment:

i) Interest Expense a/c Dr $1061170

To Interest Payable a/c $925000

To Discount on issue of bonds $136170

ii) Interest payable a/c Dr $925000

To Cash a/c $925000

3) Second Semiannual Interest payment:

i) Interest Expense a/c Dr $1061170

To Interest Payable a/c $925000

To Discount on issue of bonds $136170

ii) Interest payable a/c Dr $925000

To Cash a/c $925000

Requirement b:

Amount of interest Expense for the first year = $1061170 + $1061170 = $2122340

Requirement c:

Since the market interest rate (12%) is higher than that of coupon rate (10%), the company would be able to issue the bonda st discount and hence it is able to issue the bonds at $17138298 instead of face value at $18500000.

Amortisation table: Period Beginning Carrying Value Interest to be paid Interest paid Amortised Discount Unamortised Discount Ending Carrying Value 0 1361702 17138298 1 17138298 1061170 925000 136170.2 1225531.8 17274468.2 2 17274468 1061170 925000 136170.2 1089361.6 17410638.4 3 17410638 1061170 925000 136170.2 953191.4 17546808.6 4 17546809 1061170 925000 136170.2 817021.2 17682978.8 5 17682979 1061170 925000 136170.2 680851 17819149 6 17819149 1061170 925000 136170.2 544680.8 17955319.2 7 17955319 1061170 925000 136170.2 408510.6 18091489.4 8 18091489 1061170 925000 136170.2 272340.4 18227659.6 9 18227660 1061170 925000 136170.2 136170.2 18363829.8 10 18363830 1061170 925000 136170.2 0 18500000

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