Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the

Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $18,400,000 of five-year, 12% bonds to finance its operations of producing and selling home improvement product Interest is payable semiannually. The bonds were issued at a market effective interest rate of 13%, resulting in Chin Company receiving cash of $17,738,700 a. Journalize the entries to record the following: 1. Issuance of the bonds. 2. First semiannual interest payment. The bond discount amortization is combined with the semiannual interest payment. (Round your answer to the nearest dollar.) 3. Second semiannual interest payment. The bond discount amortization is combined with the semiannual interest payment. (Round your answer to the nearest dollar,) For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answers to the nearest dollar. 2. 3. 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 $17,738,700 rather than for the face amount of $18,400,000? The market rate of interest is the contract rate of interest.

Explanation / Answer

1.

Name of account

Debit

Credit

Issuance of bond:

Cash

$17,738,700

Discount on bonds payable

$661,300

Bonds payable

$18,400,000

Interest expense ($17,738,700 × 6.5%)

$1,153,016

Cash (18,400,000 × 6%)

$1,104,000

Discount on bonds payable ($1,153,016 - $1,104,000)

$49,016

Interest expense (($17,738,700 + $1,104,000) × 6.5%)

$1,224,776

Cash (18,400,000 × 6%)

$1,104,000

Discount on bonds payable ($1,224,776 - $1,104,000)

$120,776

2.

First semiannual interest

$1,153,016

Second semiannual interest

$1,224,776

Bond interest expense for the first year

$2,377,792

3.

Bond yield is greater than coupon rate.

Name of account

Debit

Credit

Issuance of bond:

Cash

$17,738,700

Discount on bonds payable

$661,300

Bonds payable

$18,400,000

Interest expense ($17,738,700 × 6.5%)

$1,153,016

Cash (18,400,000 × 6%)

$1,104,000

Discount on bonds payable ($1,153,016 - $1,104,000)

$49,016

Interest expense (($17,738,700 + $1,104,000) × 6.5%)

$1,224,776

Cash (18,400,000 × 6%)

$1,104,000

Discount on bonds payable ($1,224,776 - $1,104,000)

$120,776

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