On the first day of its fiscal year, Keller Company issued $25,000,000 of five–year, 10% 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 12%, resulting in Keller Company receiving cash of $23,160,113.
a. Journalize the entries to record the following:
1. Sale of the bonds.
2. First semiannual interest payment. (Amortization of discount is to be recorded annually.)
3. Second semiannual interest payment.
4. Amortization of discount at the end of the first year, using the straight-line method. (Round 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 $23,160,113 rather than for the face amount of $25,000,000.

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May 7, 2012

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