Colton Cars Co. issued $1.8 million of 5%, 5-year bonds on January 1, 2017. The bonds were dated January 1 and pay interest annually. The bonds are secured with real estate holdings and the bondholder has the option to convert the bonds into common shares. The market interest rate was 4% for these bonds. Coulton has a calendar year end.
Instructions
(a) Describe the features of these bonds.
(b) Calculate the price of the bonds and record the bond issue.
(c) Prepare an effective interest amortization table for these bonds. Round amounts to the nearest dollar.
(d) Journalize the first three interest payments assuming reversing entries have been used.
TAKING IT FURTHER
Landon Colton, the owner of Colton Cars Co., wants to know why a board of directors doesn't set the contractual interest rate at the market interest rate on the date of issue when it authorizes a bond issue. He argues that, if the contractual interest rate was set at the market rate, then companies would not have to issue bonds at a premium or discount. Explain this to Landon.