Amortize discount by interest method
On the first day of its fiscal year, Ramsey Company issued $35,000,000 of 10-year, 9% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 11%, resulting in Ramsey Company receiving cash of $30,817,399. The company uses the interest method.
a. Journalize the entries to record the following:
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 $30,817,399 rather than for the face amount of $35,000,000.