Question

method On the first day of its fiscal year, Ebert Company issued $50,000,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert receiving cash of $43,495,895. The company uses the interest method a. Journalize the entries to record the following: 1. Sale of the bonds 2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. sula e uom 3. Second semiannual interest payment, including amortization of discount. Round to the near- est dollar b. Compute the amount of the bond interest expense for the first year. Explain why the company was able to issue the bonds for only $43,495,895 rather C. than for the face amount of $50,000,000. ribnedOA

Answer 1

Journal Particulars Debit Credit Cash $4,34,95,895.00 Discount on issue of bond $65,04,105.00 To bonds payable $5,00,00,000.00 (Being Bonds issued at discount) $20,75,205.25 Interest Expenses Discount on issue on bond Cash $3,25,205.25 $17,50,000.00 $20,75,205.25 Interest Expenses Discount on issue on bond $3,25,205.25 $17,50,000.00 Cash b. Bond interest expense for the year Bonds value Interest rate Interest Expenses $4,34,95,895.00 9% $39,14,630.55 As the market interest rate on the similar bonds was higher which means investor would like to invest in other bonds in the market and to attract the customers company has to issue the bonds at price lower than face value