Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $21,000,000 of five-year, 11% 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 $20,227,094. 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. 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 $20,227,094 rather than for the face amount of $21,000,000? The market rate of interest is the contract rate of interest.

Answer 1

a)

Journal

1	Cash	772,906
	Discount on bonds payable	20,227,094
	Bonds payable		21,000,000
	(To record bond issue)
2	Interest expense	1,232,291
	Discount on bonds payable		77,291
	Cash		1,155,000
	(To record semi annual interest payment)
3	Interest expense	1,232,291
	Discount on bonds payable		77,291
	Cash		1,155,000
	(To record semi annual interest payment)

Par value of bonds = $21,000,000

Issue price of bonds = $20,227,094

Discount on bonds payable = Par value of bonds - Issue price of bonds

= 21,000,000 - 20,227,094

= $772,906

Semi annual interest payment = 21,000,000 x 11% x 6/12

= $1,155,000

Semi annual amortization of bond discount = 772,906/10

= $77,291

b)

Bond interest expense for year 1 = Semi annual interest expense x 2

= 1,232,291 x 2

= $2,464,582

c)

Market rate of interest is more than the contract rate of interest

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