Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $17,300,000 of five-year, 7% 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 9%, resulting in Chin Company receiving cash of $15,931,141. a. Journalize the entries to record the following: 1. Issuance of the bonds. 2. First semiannual interest payment. The bond discount amortization, using the straight-line method, is combined with the semiannual interest payment. (Round your answer to the nearest dollar.) 3. Second semiannual interest payment. The bond discount amortization, using the straight-line method, 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. 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 $15,931,141 rather than for the face amount of $17,300,000? The market rate of interest is the contract rate of interest.

Answer 1

Transaction no.	Accounts and explanation	Debit(in $)	Credit(in $)
1	Cash	1,59,31,141
	Discount on Bonds Payable	13,68,859
	Bonds Payable		1,73,00,000
2	Interest Expenses	7,42,386
	Discounts on Bond payable		1,36,886
	Cash		6,05,500
3	Interest Expenses	7,42,386
	Discounts on Bond payable		1,36,886
	Cash		6,05,500
	Bond Interest expenses for 1st Year =$742,386*2 =$1,484,772
	Since the Market rate of interest is higher than the stated interest rate hence the bond is issued at a discount.