Answer:
cash 20,367,938 debit
discount on bonds payable 932,062 debit
bonds payable 21,300,000 credit
--to record issuance--
interest expense 509,198.45 debit
discount on BP 83,198.45 credit
cash 426,000.00 credit
--to record first interest payment--
interest expense 511278.41 debit
discount on BP 85278.41 credit
cash 426,000.00 credit
--to record second interest payment
The company raised below the face value as the bond offer a yield lower than the epected for the market if the company try to sell the bonds at their face value it will sale none, as investorwould prefer other option with the similar risk that yield the 5% market rate.
Explanation:
Under the effective method the interest expense is determinate as the carrying value times effective rate:
20,367,938 x 0.025 (semiannual market rate) = 509,198.45
Then, we compare against cash proceeds:
21,300,000 x 0.02 = 426,000
The difference is the amortization on the dicount
Then we repeat the process in the second period but with the updated carrying value of:
20,367,938 + 85278.41 = 20,451,136
