Gabriel Co. issued $15,000,000 of five-year, 8% bonds on the first day of its fi
ID: 2572394 • Letter: G
Question
Gabriel Co. issued $15,000,000 of five-year, 8% bonds on the first day of its fiscal year. The bonds were issued at a market (effective) interest rate of 10%, resulting in Gabriel Co. receiving cash of $13,841,688.
a) Journalize the entries to record the following:
1. Issuance of the bonds
2. First semiannual interest payment using the straight-line method. The bond discount is combined with the semiannual interest payment.
3. Second semiannual interest payment using the straight-line method. The bond discount is combined with the semiannual interest payment.
b) Determine the amount of the bond interest expense for the year.
c) Explain why when the company sold the bonds, they received less than $15,000,000 in cash?
Explanation / Answer
Solution.
Face value of bond = $15,000,000
Amount received from bond = $$13,841,688.
Discount amount = $1,158,312.
1. Issuance of the bonds.
2. First semiannual interest payment using the straight-line method.
b) Determine the amount of the bond interest expense for the year.
3. Second semiannual interest payment using the straight-line method.
b) Determine the amount of the bond interest expense for the year.
$715,831 x 2 = $1,431,662.
c) Explain why when the company sold the bonds, they received less than $15,000,000 in cash.
Because current market yield of bond is 10% while coupon rate is 8%. so this is the resion of less amount received.
Date Account Title Debit Credit Cash 13,841,688 Discount on bonds payable 1,158,312 Bond Payable 15,000,000 (Bond issue on discount)Related Questions
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