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G Q On 1/1/21, Ebert Company issued $21,000,000 of 5-year, 9% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at
G Q On 1/1/21, Ebert Company issued $21,000,000 of 5-year, 9% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 7%, resulting in Ebert receiving cash of $22,746,487. The company uses the effective interest method Journalize the entries to record the following: 1. Issuance of the bonds. 1/1/2021 5 7 8 2. First semiannual interest payment, including amortization of discount/premium. 6/30/2021 10 11 12 13 Effective Interest Method of Amortization Calculation 1. Bond Interest Expense 2. Bond Interest Paid 3. Amortization Amount 16 17 ANNUAL 18 SEMIANNUAL 19 20 3. Second semiannual interest payment, including amortization of discount/premium. 21 12/31/2021 22 23 24 25 Effective Interest Method of Amortization Calculation 26 1. Bond Interest Expense 2. Bond Interest Paid 3. Amortization Amount 27 28 29 ANNUAL 30 SEMIANNUAL 31 32 b. Compute the amount of the bond interest expense for the first year. 33 34 Annual interest paid 35 Discount/Premium amortized 36 Interest expense for first year 37. 36 c. Explain why the company was able to issue the bonds for $22,746,487 rather than for the face amount of $21,000,000. 39 The bonds sell for more than their face amount because the market rate of interest is the contract rate of interest. 40 Investors willing to pay more than the full face amount for bond: that pay a greater contract rate of interest than the rate they could eam on similar bonds (market rate) 41 42 43 44
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