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 on January 1.
2.	First semiannual interest payment on June 30, including amortization of discount. Round to the nearest dollar.
3.	Second semiannual interest payment on December 31, 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.

X

Chart of Accounts

CHART OF ACCOUNTSEbert CompanyGeneral Ledger

	ASSETS
110	Cash
111	Petty Cash
121	Accounts Receivable
122	Allowance for Doubtful Accounts
126	Interest Receivable
127	Notes Receivable
131	Merchandise Inventory
141	Office Supplies
142	Store Supplies
151	Prepaid Insurance
191	Land
192	Store Equipment
193	Accumulated Depreciation-Store Equipment
194	Office Equipment
195	Accumulated Depreciation-Office Equipment

	LIABILITIES
210	Accounts Payable
221	Salaries Payable
231	Sales Tax Payable
232	Interest Payable
241	Notes Payable
251	Bonds Payable
252	Discount on Bonds Payable
253	Premium on Bonds Payable

	EQUITY
311	Common Stock
312	Paid-In Capital in Excess of Par-Common Stock
315	Treasury Stock
321	Preferred Stock
322	Paid-In Capital in Excess of Par-Preferred Stock
331	Paid-In Capital from Sale of Treasury Stock
340	Retained Earnings
351	Cash Dividends
352	Stock Dividends

	REVENUE
410	Sales
610	Interest Revenue
611	Gain on Redemption of Bonds

	EXPENSES
510	Cost of Merchandise Sold
515	Credit Card Expense
516	Cash Short and Over
521	Sales Salaries Expense
522	Office Salaries Expense
531	Advertising Expense
532	Delivery Expense
533	Repairs Expense
534	Selling Expenses
535	Rent Expense
536	Insurance Expense
537	Office Supplies Expense
538	Store Supplies Expense
541	Bad Debt Expense
561	Depreciation Expense-Store Equipment
562	Depreciation Expense-Office Equipment
590	Miscellaneous Expense
710	Interest Expense
711	Loss on Redemption of Bonds

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

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JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2
3
4
5
6
7
8
9

b. Compute the amount of the bond interest expense for the first year. Enter amounts as a positive number.

Annual interest paid
Discount amortized
Interest expense for 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.

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).

at \$10,bra,344. The company uses the nerest method Pposired. 1. Sole of the bondi an dituary 3 b. Compute the anount of the bood inberi expene for the frit year. Instructions Chart of Accounts Or CHART OF ACCOUNTS Ebert Company General Ledger ASSETS REVENUE 110 Cash 410 Sales 111 Petty Cash 610 Interest Revenue 121 Accounts Recoivable 611 Gain on Redemption of Bonds 122 Allowance for Doubttul Accounts 126 Interest Receivable EXPENSES 127 Notes Receivable 510 Cost of Merchandiso Sold Chart of Accounts ICe Aluwance lur vouvuir Acowonits 126 Interest Receivable EXPENSES 127 Notes Recelvable 510 Cost of Merchandise Sold 131 Merchandise Inventory 515 Credit Card Expense 141 Office Supplies 516 Cash Short and Over 142 Store Supplies 521 Sales Salaries Expense 151 Prepaid Insurance 522 Office Salaries Expense 191 Land 531 Advertising Expense 192 Store Equipment 532 Delivery Expense 193 Accumulated Depreciation-Store Equipment 533 Repairs Expense 194 Office Equipment 534 Selling Expenses 195 Accumulated Depreciation-Office Equipment 535 Rent Expense Chart of Accounts 195 Aocumulated Depreciation-Office Equipment 535 Rent Expense 536 Insurance Expense LIABILITIES 537 Office Supplies Expense 210 Accounts Payable 538 Store Supplies Expense 221 Salaries Payable 541 Bad Debt Expense 231 Sales Tax Payable 561 Depreciation Expense-Store Equipment 232 Interest Payable 562 Depreciation Expense-Office Equipment 241 Notes Payable 590 Miscellaneous Expense 251 Bonds Payable 710 interest Expense 252. Discount on Bonds Payable 711 Loss on Redemption of Bonds 253 Premium on Bonds Payable EQUITY 311 Common Stock 312 Paid-In Capital in Excess of Par-Common Stock 315 Treasury Stock 321 Proforred Stock 322 Paid-In Capital in Excess of Par-Preferred Stock 331 Paid-in Capital from Sale of Treasury Stock 340 Retained Eamings 351 Cash Dividends 352 Stock Dividends a. Joumalize the entries fo record the transactions. Refer to the Chart of Accounts for exact wording of account biles. Round to the nearest dollar. Joumal 1. tan1 2 3 5 7 9 6. Cortpule the anount of the bond nterest epense is the frat jwac Entor anounder an a gonthe number The tared rede d reesat histore the pase crey coul exn on sirnilar bond imaked rawy