Problem

On January 1, the first day of its fiscal year, Pretender Company issued $12,700,000 of five-year, 11% bonds to finance its operations of producing and selling home improvement products. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 13 resulting in Pretender Company receiving cash of $11,787,069

Required:

A. Journalize the entries to record the following (refer to the Chart of Accounts for exact wording of account titles)

1. Issuance of the bonds.

2. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)

3. Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar).

B. Determine the amount of the bond interest expense for the first year.

C. Explain why the company was able to issue the bonds for only $12,787,069 rather than for the face amount of $12,700,000.