On the first day of its fiscal year, Chin Company issued $24,400,000 of five-yea

Question

On the first day of its fiscal year, Chin Company issued $24,400,000 of five-year, 4% 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 6%, resulting in Chin receiving cash of $22,318,534.

a. Journalize the entries to record the following:

Issuance of the bonds.

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

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

If an amount box does not require an entry, leave it blank. Round your answers to the nearest dollar.

b. Determine the amount of the bond interest expense for the first year.
$

c. Why was the company able to issue the bonds for only $22,318,534 rather than for the face amount of $24,400,000?
The market rate of interest is the contract rate of interest. Therefore, inventors willing to pay the full face amount of the bonds.

1. 2. 3.

Explanation / Answer

a) Journal Entries (Amounts in $)

b) Bond interest expense for first year = $669,556+$675,003 = $1,344,559

c) The market value of interest (i.e. 6%) is less than the rate of interest on bonds (i.e. 4%). Therefore, investors willing to pay less than the face value of the bonds.

No. Account Titles and Explanations Debit Credit 1. Cash 22,318,534 Discount on Bonds Payable (Bal. fig) (24,400,000-22,318,534) 2,081,466 Bonds Payable 24,400,000 (To record the issuance of bonds) 2. Interest Expense ($22,318,534*6%*6/12) 669,556 Discount on Bonds Payable (669,556 - 448,000) 181,556 Cash ($24,400,000*4%*6/12) 448,000 (To record the first interest payment) 3. Interest Expense [(22,318,534+181,556)*6%*6/12] 675,003 Discount on Bonds Payable (675,003 - 448,000) 227,003 Cash ($24,400,000*4%*6/12) 448,000 (To record the second interest payment)

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