Question

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

On the first day of its fiscal year, Chin Company issued $10,600,000 of five-year, 9% 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 11%, resulting in Chin Company receiving cash of $9,801,008.

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.

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 $9,801,008 rather than for the face amount of $10,600,000?
The market rate of interest is   the contract rate of interest.

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method

Daan Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Daan Corporation issued $4,400,000 of 6-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $4,825,187. Interest is payable semiannually on April 1 and October 1.

a. Journalize the entry to record the issuance of bonds on April 1, 2016. For a compound transaction, if an amount box does not require an entry, leave it blank.

b. Journalize the entry to record the first interest payment on October 1, 2016, and amortization of bond premium for six months, using the straight-line method. The bond premium amortization is combined with the semiannual interest payment. (Round to the nearest dollar.) For a compound transaction, if an amount box does not require an entry, leave it blank.

c. Why was the company able to issue the bonds for $4,825,187 rather than for the face amount of $4,400,000?

The market rate of interest is   the contract rate of interest.

Answer 1

Ans. a)                           Journal Entry in the books of Chin company

1. at the time of issuing bonds

                                                  Cash A/c Dr . 9801008

                                                  Discount on bond A/c 798992

                                                        To 9% Bond A/c             10600000

                                      (Being 9% bond issued at discount )

2. at first interest payment time

                                             Interest Expenses A/c Dr . 556899

                                                      To Discount on bond A/c 79899

                                                      To Cash A/c                     477000

                             (being interest payment of bond along with discount amoritization )

3. At the time of second interest payment time

                                            Interest Expenses A/c Dr 556899

                                                   To Discount on bond A/c   79899

                                                   To Cash A/c                     477000

                          (being interest paid on 9% bond )

b) Total Interest expenses for the first year (556899X2) = 1113798

c) The reason of company received less amount of its face value of bond is market is offering more rate of interest and company is paying less.and we calculating present value of cash flow using market rate if market is higher than present value of cash flow become lower. means higher the rate lower the PV

Working Note: Bond Amortization straight line method

Total year of bond life 5yrs , total period of bond interest payment is 10

Half yearly amortization = (10600000-9801008)/10 = 79899

Ans. 2                                         Journal Entry in the books of DAAN Corporation

Apr 1 2016,                                   Cash A/c Dr.           4825187

                                                       To 9% Bond A/c             4400000

                                                       To Premium on bond A/c   425187

                                                  (being 9% bond issued at premium )

Oct 1 2016                                  Interest Expenses A/c Dr. 162568

                                             Premium on bond A/c Dr. 35432

                                                         To Cash A/c            198000

                                              (being interest paid on 9% bond for oct 2016)

c) Reason for company received 4825187/- instead of bond face value 4400000/- because of company is paying rate of interest more than market rate of interest. and for calculating present value of cash we are using market rate of interest if market rate is lower than company offer rate than present value of bond will be more than bond face value. means lower the rate higher the PV.

Premium amortization Calculation

Total life of bond is 6years, total payment of interest is 12

Total premium = (4825187-4400000)/12 = 35432