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:

Question Content Area

$1.$ Sale of the bonds. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

blankAccountDebitCredit

blank

Question Content Area

$2.$ 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.

blankAccountDebitCredit

blank

Question Content Area

$3.$ 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.

blankAccountDebitCredit

blank

Question Content Area

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

Line Item Description Bond Interest Expense

Annual interest paid fill in the blank $1$ of $3$$

Discount amortized fill in the blank $2$ of $3$

Interest expense for first year fill in the blank $3$ of $3$$

Question Content Area

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 fill in the blank $1$ of $2$

the contract rate of interest. Investors fill in the blank $2$ of $2$

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$).$