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Nature Gnome Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down
Nature Gnome Company is considering raising additional capital for further expansion. The company wants to finance a new business venture into guided trips down the Amazon River in South America. Additionally, the company wants to add another building on their land to offer more services for local customers. Nature Gnome Company plans to raise the capital by issuing $300,000 of 9%, seven-year bonds on January 2, 2026. The bonds pay interest semiannually on June 30 and December 31. The company receives $298,180 when the bonds are issued. The company also issues a mortgage payable for $250,000 on January 2, 2026. The proceeds from the mortgage will be used to construct the new building. The mortgage requires annual payments of $25,000 plus interest for ten years, payable on December 31. The mortgage interest rate is 10%. 1. Will the bonds issue at face value, a premium, or a discount? 2. Record the following transactions. Include dates and round to the nearest dollar. Omit explanations. a. Cash received from the bond issue. b. Cash received from the mortgage payable. c. Semiannual bond interest payments for 2026. Amortize the premium or discount using the straight-line amortization method. 3. d. Payment on the mortgage payable for 2026. Calculate the total interest expense incurred in 2026. Requirement 1. Will the bonds issue at face value, a premium, or a discount? Nature Gnome's bonds will be issued at a discount because the cash proceeds are less than the face value of the bonds. Requirement 2. Record the following transactions. Include dates and round to the nearest dollar. Omit explanations. (Round your answers to the nearest whole dollar. Record debits first, then credits. Exclude explanations from any journal entries.) a. Cash received from the bond issue. Date 2026 Jan. 2 Accounts Cash Discount on Bonds Payable Bonds Payable Debit 797,600 2,400 Credit 800,000 b. Cash received from the mortgage payable. Date 2026 Jan. 2 Cash Date Mortgages Payable Accounts 2026 Jun. 30 Interest Expense Debit Accounts 600,000 c. Semiannual bond interest payments for 2026. Amortize the premium or discount using the straight-line amortization method. Start by recording the semiannual bond interest payment on June 30, 2026. Debit Credit 28,120 600,000 Credit Now record the semiannual bond interest payment on December 31, 2026. Date 2026 Dec. 31 Discount on Bonds Payable Cash Date 2026 Interest Expense Accounts d. Payment on the mortgage payable for 2026. Discount on Bonds Payable Cash Accounts Debit 28,120 Debit 120 28,000 Credit 120 28,000 Credit Dec. 31 Mortgages Payable Interest Expense Cash Requirement 3. Calculate the total interest expense incurred in 2026. Total 2026 Interest Expense $ 56,240 42,000 98,240 Bonds Mortgage Total 30,000 42,000 72,000
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