Alphabet Toy Company has plans for a plant expansion and needs to raise additional capital to pay for the construction. The company is considering issuing seven-year, 6% mortgage bonds with a par value of $1 million. The bonds will pay interest semi-annually.
Required:
a. What are mortgage bonds? Explain how the fact that these are mortgage bonds would affect the interest rate dictated by the market (the yield rate).
b. Calculate the amount of cash the company will receive if the bonds are sold at a yield rate of:
i. 6%
ii. 8%
iii. 4%
c. Prepare the journal entry Alphabet Toy would record at the time of the issuance of the bonds under each of the alternative yields. Also prepare the journal entries to record the interest expense for the first two periods under each alternative.