On the first day of its fiscal year, Keller Company issued $25,000,000 of a five

Question

On the first day of its fiscal year, Keller Company issued $25,000,000 of a 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 Keller Company receiving cash of $23,160,113.

(a) Journalize the entries to record the following:

1. Sale of the bonds.

2. First semiannual interest payment.   (Amortization of discount is to be recorded annually)

3. Second semiannual interest payment.

4. Amortization of discount at the end of the first year, using the straight-line method.  (Rounded 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 $23,160,113 rather than for the face amount of $25,000,000.

Explanation / Answer

1.
Debit Cash 23,160,113
Debit Discount on Bonds Payable 1,839,887
Credit Bonds Payable 25,000,000

2.
Debit Bond Interest Expense 1,250,000
Credit Cash 1,250,000
[25,000,000 x 10% x 6/12]

3. and 4.
Debit Bond Interest Expense 1,433,989
Credit Discount on Bonds Payable 183,989 [1,839,887 / 10 years]
Credit Cash 1,250,000

(b)
1,250,000 + 1,433,989 = 2,683,989

(c)
The bonds were issued at a discount because the stated rate on the bonds (10%) is less than the market rate (12%).

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.