Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method
On the first day of its fiscal year, Chin Company issued $10,900,000 of five-year, 10% 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 12%, resulting in Chin Company receiving cash of $10,097,700.
a. Journalize the entries to record the following:
For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answers to the nearest dollar.
1. | |||
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 $10,097,700 rather than for the face amount of
$10,900,000?
The market rate of interest is the contract rate
of interest.
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Part a | ||||
Date | Account | Debit | Credit | |
1 | Cash | $ 10,097,700 | ||
Discount on Bond Payable | $ 802,300 | |||
Bond Payable | $ 10,900,000 | |||
(To record issuance of bond) | ||||
2 | Interest Expense | $ 625,230 | ||
Discount on Bond Payable ($802,300/10) | $ 80,230 | |||
Cash ($1,0900,000*5%) | $ 545,000 | |||
(To record first semiannual interest payment) | ||||
3 | Interest Expense | $ 625,230 | ||
Discount on Bond Payable ($802,300/10) | $ 80,230 | |||
Cash ($1,0900,000*5%) | $ 545,000 | |||
(To record Second semiannual interest payment) | ||||
Part b | Bond Interest Expense for 1st year | $ 625,230 | ||
(From Entry no 2) | ||||
Part c | More | |||
Since market rate of interest was more than given rate, bonds were able | ||||
to fetch less than face value. | ||||
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