Amortize Discount by Interest Method

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 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. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

		fill in the blank 3cd12efbb043075_2	fill in the blank 3cd12efbb043075_3
		fill in the blank 3cd12efbb043075_5	fill in the blank 3cd12efbb043075_6
		fill in the blank 3cd12efbb043075_8	fill in the blank 3cd12efbb043075_9

2. First semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

		fill in the blank 6363b5f9d058fa2_2	fill in the blank 6363b5f9d058fa2_3
		fill in the blank 6363b5f9d058fa2_5	fill in the blank 6363b5f9d058fa2_6
		fill in the blank 6363b5f9d058fa2_8	fill in the blank 6363b5f9d058fa2_9

3. Second semiannual interest payment, including amortization of discount. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

		fill in the blank 5294f0fe001ffbd_2	fill in the blank 5294f0fe001ffbd_3
		fill in the blank 5294f0fe001ffbd_5	fill in the blank 5294f0fe001ffbd_6
		fill in the blank 5294f0fe001ffbd_8	fill in the blank 5294f0fe001ffbd_9

b. Compute the amount of the bond interest expense for the first year. Round to the nearest dollar.

Annual interest paid	$fill in the blank 93832007a044028_1
Discount amortized	fill in the blank 93832007a044028_2
Interest expense for first year	$fill in the blank 93832007a044028_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.

The bonds sell for less than their face amount because the market rate of interest is the contract rate of interest. Investors willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate).