Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $28,100,000 of five-year, 8% 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 $26,988,330. 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. Cash 26,988,330 Discount on Bonds Payable 1,111,670 Bonds Payable 28,100,000 Interest Expense 1,124,000 Discount on Bonds Payable 111,167 Cash 1,235,167

Answer 1

Solution:

a) Journal Entries:

Sl No.	Account Titles and Explanation	Debit	Credit
1	Cash	$              26,988,330
	Discount on Bonds Payable	$                1,111,670
	Bonds Payable		$        28,100,000
	(Being bond issued at discount )
2	Interest Expense	$                1,235,167
	Discount on Bonds Payable		$              111,167
	Cash ( $ 28,100,000 * 8/100) / 2		$          1,124,000
	( Being interest expense paid)
3	Interest Expense	$                1,235,167
	Discount on Bonds Payable		$              111,167
	Cash		$          1,124,000
	( Being interest expense paid)

b) Amount of Bond Interest Expense for Year 1 = $ 1,235,167 + $ 1,235,167 = $ 2,470,334.

c) The market rate of interest is morethan the contract rate of interest.

Market rate of 9% is more than bond interest rate of 8%.

Notes:

1) Discount is amortized over the period of 5 years, but here interest is paying semi annually. So, we have amortize the discount twice a year.

= ($ 1,111,670 / 5 years ) / 2 (twice a year) = $ 111,167

2) Cash interest paid will be calculated based on face value of Bonds = ( $28,100,000 * 8%) / 2 (twice a year) = $ 1,124,000.

3) Interest expense arrived by adding Discount Amortized and Cash paid as Interest.