On the first day of its fiscal year, Ebert Company issued $12,500,000 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 $10,873,974 The company uses the interest method Required a Journalize the entries to record the following transactions Refer to the Chart of Accounts for exact wording of account titles 1 Sale of the bonds 2 First semiannual interest payment, including amortization of discount Round to the nearest dollar 3 Second semiannual interest payment, including amortization of discount Round to the nearest dollar b Compute the amount of the bond interest expense for the first year c Explain why the company was able to issue the bonds for only $10,873,974 rather than for the face amount of $12,500,000 Two present value tables are provided Present Value of $1 at Compound Interest Due in n Periods and Present Value of Ordinary Annuity of $1 per Period Use them as directed in the problem requirements Present Value of $1 at Compound Interest Due in n Periods Periods 4 0 4 5 5 5 5 6 6 5 7 1 0 96154 0 95694 0 95238 0 94787 0 94340 0 93897 0 93458 2 0 92456 0 91573 0 90703 0 89845 0 89000 0 88166 0 87344 3 0 88900 0 87630 0 86384 0 85161 0 83962 0 82785 0 81630 4 0 85480 0 83856 0 82270 0 80722 0 79209 0 77732 0 76290 5 0 82193 0 80245 0 78353 0 76513 0 74726 0 72988 0 71299 6 0 79031 0 76790 0 74622 0 72525 0 70496 0 68533 0 66634 7 0 75992 0 73483 0 71068 0 68744 0 66506 0 64351 0 62275 8 0 73069 0 70319 0 67684 0 65160 0 62741 0 60423 0 58201 9 0 70259 0 67290 0 64461 0 61763 0 59190 0 56735 0 54393 10 0 67556 0 64393 0 61391 0 58543 0 55839 0 53273 0 50835 11 0 64958 0 61620 0 58468 0 55491 0 52679 0 50021 0 47509 12 0 62460 0 58966 0 55684 0 52598 0 49697 0 46968 0 44401 13 0 60057 0 56427 0 53032 0 49856 0 46884 0 44102 0 41496 14 0 57748 0 53997 0 50507 0 47257 0 44230 0 41410 0 38782 15 0 55526 0 51672 0 48102 0 44793 0 41727 0 38883 0 36245 16 0 53391 0 49447 0 45811 0 42458 0 39365 0 36510 0 33873 17 0 51337 0 47318 0 43630 0 40245 0 37136 0 34281 0 31657 18 0 49363 0 45280 0 41552 0 38147 0 35034 0 32189 0 29586 19 0 47464 0 43330 0 39573 0 36158 0 33051 0 30224 0 27651 20 0 45639 0 41464 0 37689 0 34273 0 31180 0 28380 0 25842 21 0 43883 0 39679 0 35894 0 32486 0 29416 0 26648 0 24151 22 0 42196 0 37970 0 34185 0 30793 0 27751 0 25021 0 22571 23 0 40573 0 36335 0 32557 0 29187 0 26180 0 23494 0 21095 24 0 39012 0 34770 0 31007 0 27666 0 24698 0 22060 0 19715 25 0 37512 0 33273 0 29530 0 26223 0 23300 0 20714 0 18425 26 0 36069 0 31840 0 28124 0 24856 0 21981 0 19450 0 17220 27 0 34682 0 30469 0 26785 0 23560 0 20737 0 18263 0 16093 28 0 33348 0 29157 0 25509 0 22332 0 19563 0 17148 0 15040 29 0 32065 0 27902 0 24295 0 21168 0 18456 0 16101 0 14056 30 0 30832 0 26700 0 23138 0 20064 0 17411 0 15119 0 13137 31 0 29646 0 25550 0 22036 0 19018 0 16425 0 14196 0 12277 32 0 28506 0 24450 0 20987 0 18027 0 15496 0 13329 0 11474 33 0 27409 0 23397 0 19987 0 17087 0 14619 0 12516 0 10723 34 0 26355 0 22390 0 19035 0 16196 0 13791 0 11752 0 10022 35 0 25342 0 21425 0 18129 0 15352 0 13011 0 11035 0 09366 40 0 20829 0 17193 0 14205 0 11746 0 09722 0 08054 0 06678 45 0 17120 0 13796 0 11130 0 08988 0 07265 0 05879 0 04761 50 0 14071 0 11071 0 08720 0 06877 0 05429 0 04291 0 03395 Present Value of Ordinary Annuity of $1 per Period Periods 4 0 4 5 5 5 5 6 6 5 7 1 0 96154 0 95694 0 95238 0 94787 0 94340 0 93897 0 93458 2 1 88609 1 87267 1 85941 1 84632 1 83339 1 82063 1 80802 3 2 77509 2 74896 2 72325 2 69793 2 67301 2 64848 2 62432 4 3 62990 3 58753 3 54595 3 50515 3 46511 3 42580 3 38721 5 4 45182 4 38998 4 32948 4 27028 4 21236 4 15568 4 10020 6 5 24214 5 15787 5 07569 4 99553 4 91732 4 84101 4 76654 7 6 00205 5 89270 5 78637 5 68297 5 58238 5 48452 5 38929 8 6 73274 6 59589 6 46321 6 33457 6 20979 6 08875 5 97130 9 7 43533 7 26879 7 10782 6 95220 6 80169 6 65610 6 51523 10 8 11090 7 91272 7 72173 7 53763 7 36009 7 18883 7 02358 11 8 76048 8 52892 8 30641 8 09254 7 88687 7 68904 7 49867 12 9 38507 9 11858 8 86325 8 61852 8 38384 8 15873 7 94269 13 9 98565 9 68285 9 39357 9 11708 8 85268 8 59974 8 35765 14 10 56312 10 22283 9 89864 9 58965 9 29498 9 01384 8 74547 15 11 11839 10 73955 10 37966 10 03758 9 71225 9 40267 9 10791 16 11 65230 11 23402 10 83777 10 46216 10 10590 9 76776 9 44665 17 12 16567 11 70719 11 27407 10 86461 10 47726 10 11058 9 76322 18 12 65930 12 15999 11 68959 11 24607 10 82760 10 43247 10 05909 19 13 13394 12 59329 12 08532 11 60765 11 15812 10 73471 10 33560 20 13 59033 13 00794 12 46221 11 95038 11 46992 11 01851 10 59401 21 14 02916 13 40472 12 82115 12 27524 11 76408 11 28498 10 83553 22 14 45112 13 78442 13 16300 12 58317 12 04158 11 53520 11 06124 23 14 85684 14 14777 13 48857 12 87504 12 30338 11 77014 11 27219 24 15 24696 14 49548 13 79864 13 15170 12 55036 11 99074 11 46933 25 15 62208 14 82821 14 09394 13 41393 12 78336 12 19788 11 65358 26 15 98277 15 14661 14 37519 13 66250 13 00317 12 39237 11 82578 27 16 32959 15 45130 14 64303 13 89810 13 21053 12 57500 11 98671 28 16 66306 15 74287 14 89813 14 12142 13 40616 12 74648 12 13711 29 16 98371 16 02189 15 14107 14 33310 13 59072 12 90749 12 27767 30 17 29203 16 28889 15 37245 14 53375 13 76483 13 05868 12 40904 31 17 58849 16 54439 15 59281 14 72393 13 92909 13 20063 12 53181 32 17 87355 16 78889 15 80268 14 90420 14 08404 13 33393 12 64656 33 18 14765 17 02286 16 00255 15 07507 14 23023 13 45909 12 75379 34 18 41120 17 24676 16 19290 15 23703 14 36814 13 57661 12 85401 35 18 66461 17 46101 16 37419 15 39055 14 49825 13 68696 12 94767 40 19 79277 18 40158 17 15909 16 04612 15 04630 14 14553 13 33171 45 20 72004 19 15635 17 77407 16 54773 15 45583 14 48023 13 60552 50 21 48218 19 76201 18 25593 16 93152 15 76186 14 72452 13 80075 ANSWER THESE b Compute the amount of the bond interest expense for the first year Annual interest paid Plus discount amortized Interest expense for first year FINAL QUESTION Explain why the company was able to issue the bonds for only $10,873,974 rather than for the face amount of $12,500,000 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)

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On the first day of its fiscal year, Ebert Company issued $12,500,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The

On the first day of its fiscal year, Ebert Company issued $12,500,000 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 $10,873,974. The company uses the interest method.

Required:

a. Journalize the entries to record the following transactions. Refer to the Chart of Accounts for exact wording of account titles.

1.	Sale of the bonds.
2.	First semiannual interest payment, including amortization of discount. Round to the nearest dollar.
3.	Second semiannual interest payment, including amortization of discount. Round to the nearest dollar.

b. Compute the amount of the bond interest expense for the first year.

c. Explain why the company was able to issue the bonds for only $10,873,974 rather than for the face amount of $12,500,000.

Two present value tables are provided: Present Value of $1 at Compound Interest Due in n Periods and Present Value of Ordinary Annuity of $1 per Period. Use them as directed in the problem requirements.

Present Value of $1 at Compound Interest Due in n Periods
Periods	4.0%	4.5%	5%	5.5%	6%	6.5%	7%
1	0.96154	0.95694	0.95238	0.94787	0.94340	0.93897	0.93458
2	0.92456	0.91573	0.90703	0.89845	0.89000	0.88166	0.87344
3	0.88900	0.87630	0.86384	0.85161	0.83962	0.82785	0.81630
4	0.85480	0.83856	0.82270	0.80722	0.79209	0.77732	0.76290
5	0.82193	0.80245	0.78353	0.76513	0.74726	0.72988	0.71299
6	0.79031	0.76790	0.74622	0.72525	0.70496	0.68533	0.66634
7	0.75992	0.73483	0.71068	0.68744	0.66506	0.64351	0.62275
8	0.73069	0.70319	0.67684	0.65160	0.62741	0.60423	0.58201
9	0.70259	0.67290	0.64461	0.61763	0.59190	0.56735	0.54393
10	0.67556	0.64393	0.61391	0.58543	0.55839	0.53273	0.50835
11	0.64958	0.61620	0.58468	0.55491	0.52679	0.50021	0.47509
12	0.62460	0.58966	0.55684	0.52598	0.49697	0.46968	0.44401
13	0.60057	0.56427	0.53032	0.49856	0.46884	0.44102	0.41496
14	0.57748	0.53997	0.50507	0.47257	0.44230	0.41410	0.38782
15	0.55526	0.51672	0.48102	0.44793	0.41727	0.38883	0.36245
16	0.53391	0.49447	0.45811	0.42458	0.39365	0.36510	0.33873
17	0.51337	0.47318	0.43630	0.40245	0.37136	0.34281	0.31657
18	0.49363	0.45280	0.41552	0.38147	0.35034	0.32189	0.29586
19	0.47464	0.43330	0.39573	0.36158	0.33051	0.30224	0.27651
20	0.45639	0.41464	0.37689	0.34273	0.31180	0.28380	0.25842
21	0.43883	0.39679	0.35894	0.32486	0.29416	0.26648	0.24151
22	0.42196	0.37970	0.34185	0.30793	0.27751	0.25021	0.22571
23	0.40573	0.36335	0.32557	0.29187	0.26180	0.23494	0.21095
24	0.39012	0.34770	0.31007	0.27666	0.24698	0.22060	0.19715
25	0.37512	0.33273	0.29530	0.26223	0.23300	0.20714	0.18425
26	0.36069	0.31840	0.28124	0.24856	0.21981	0.19450	0.17220
27	0.34682	0.30469	0.26785	0.23560	0.20737	0.18263	0.16093
28	0.33348	0.29157	0.25509	0.22332	0.19563	0.17148	0.15040
29	0.32065	0.27902	0.24295	0.21168	0.18456	0.16101	0.14056
30	0.30832	0.26700	0.23138	0.20064	0.17411	0.15119	0.13137
31	0.29646	0.25550	0.22036	0.19018	0.16425	0.14196	0.12277
32	0.28506	0.24450	0.20987	0.18027	0.15496	0.13329	0.11474
33	0.27409	0.23397	0.19987	0.17087	0.14619	0.12516	0.10723
34	0.26355	0.22390	0.19035	0.16196	0.13791	0.11752	0.10022
35	0.25342	0.21425	0.18129	0.15352	0.13011	0.11035	0.09366
40	0.20829	0.17193	0.14205	0.11746	0.09722	0.08054	0.06678
45	0.17120	0.13796	0.11130	0.08988	0.07265	0.05879	0.04761
50	0.14071	0.11071	0.08720	0.06877	0.05429	0.04291	0.03395

Present Value of Ordinary Annuity of $1 per Period
Periods	4.0%	4.5%	5%	5.5%	6%	6.5%	7%
1	0.96154	0.95694	0.95238	0.94787	0.94340	0.93897	0.93458
2	1.88609	1.87267	1.85941	1.84632	1.83339	1.82063	1.80802
3	2.77509	2.74896	2.72325	2.69793	2.67301	2.64848	2.62432
4	3.62990	3.58753	3.54595	3.50515	3.46511	3.42580	3.38721
5	4.45182	4.38998	4.32948	4.27028	4.21236	4.15568	4.10020
6	5.24214	5.15787	5.07569	4.99553	4.91732	4.84101	4.76654
7	6.00205	5.89270	5.78637	5.68297	5.58238	5.48452	5.38929
8	6.73274	6.59589	6.46321	6.33457	6.20979	6.08875	5.97130
9	7.43533	7.26879	7.10782	6.95220	6.80169	6.65610	6.51523
10	8.11090	7.91272	7.72173	7.53763	7.36009	7.18883	7.02358
11	8.76048	8.52892	8.30641	8.09254	7.88687	7.68904	7.49867
12	9.38507	9.11858	8.86325	8.61852	8.38384	8.15873	7.94269
13	9.98565	9.68285	9.39357	9.11708	8.85268	8.59974	8.35765
14	10.56312	10.22283	9.89864	9.58965	9.29498	9.01384	8.74547
15	11.11839	10.73955	10.37966	10.03758	9.71225	9.40267	9.10791
16	11.65230	11.23402	10.83777	10.46216	10.10590	9.76776	9.44665
17	12.16567	11.70719	11.27407	10.86461	10.47726	10.11058	9.76322
18	12.65930	12.15999	11.68959	11.24607	10.82760	10.43247	10.05909
19	13.13394	12.59329	12.08532	11.60765	11.15812	10.73471	10.33560
20	13.59033	13.00794	12.46221	11.95038	11.46992	11.01851	10.59401
21	14.02916	13.40472	12.82115	12.27524	11.76408	11.28498	10.83553
22	14.45112	13.78442	13.16300	12.58317	12.04158	11.53520	11.06124
23	14.85684	14.14777	13.48857	12.87504	12.30338	11.77014	11.27219
24	15.24696	14.49548	13.79864	13.15170	12.55036	11.99074	11.46933
25	15.62208	14.82821	14.09394	13.41393	12.78336	12.19788	11.65358
26	15.98277	15.14661	14.37519	13.66250	13.00317	12.39237	11.82578
27	16.32959	15.45130	14.64303	13.89810	13.21053	12.57500	11.98671
28	16.66306	15.74287	14.89813	14.12142	13.40616	12.74648	12.13711
29	16.98371	16.02189	15.14107	14.33310	13.59072	12.90749	12.27767
30	17.29203	16.28889	15.37245	14.53375	13.76483	13.05868	12.40904
31	17.58849	16.54439	15.59281	14.72393	13.92909	13.20063	12.53181
32	17.87355	16.78889	15.80268	14.90420	14.08404	13.33393	12.64656
33	18.14765	17.02286	16.00255	15.07507	14.23023	13.45909	12.75379
34	18.41120	17.24676	16.19290	15.23703	14.36814	13.57661	12.85401
35	18.66461	17.46101	16.37419	15.39055	14.49825	13.68696	12.94767
40	19.79277	18.40158	17.15909	16.04612	15.04630	14.14553	13.33171
45	20.72004	19.15635	17.77407	16.54773	15.45583	14.48023	13.60552
50	21.48218	19.76201	18.25593	16.93152	15.76186	14.72452	13.80075

ANSWER THESE:

b. Compute the amount of the bond interest expense for the first year.


Annual interest paid
Plus discount amortized
Interest expense for first year

FINAL QUESTION:

Explain why the company was able to issue the bonds for only $10,873,974 rather than for the face amount of $12,500,000.

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).