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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 Company 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. 3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. b. Compute the amount of the bond interest expense for the first year. c. Explain why the company was able to issue the bonds for only $43,495,895 rather than for the face amount of $50,000,000.

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 23E
Textbook Problem
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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 Company receiving cash of $43,495,895. The company uses the interest method.

  1.        a.       Journalize the entries to record the following:
    1. 1. Sale of the bonds.
    2. 2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar.
    3. 3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar.
  2.       b.       Compute the amount of the bond interest expense for the first year.
  3.        c.       Explain why the company was able to issue the bonds for only $43,495,895 rather than for the face amount of $50,000,000.

a (1)

To determine

Journalize the sale of the bonds.

Explanation of Solution

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

Effective-interest amortization method: Effective-interest amortization method it is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

Journalize sale of bonds.

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

 Cash  43,495,895 
  

a (2)

To determine

Journalize first semiannual interest payment and amortization of discount on bonds.

a (3)

To determine

Journalize second semiannual interest payment and amortization of discount on bonds.

b.

To determine

Calculate the amount of bond interest expense for first year.

c.

To determine

Explain the reason why the company was able to issue the bonds for $43,495,895 rather than $50,000,000.

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Chapter 14 Solutions

Financial Accounting
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