Accounting 26th Edition by Carl Warren ,Jim Reeve ,Jonathan Duchac

Exercise 14

Entries for issuing bonds and amortizing discount by straight-line method
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 rate 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 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 $17,138,298 rather than for the face amount of $18,500,000.