Question

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

On the first day of its fiscal year, Chin Company issued $23,600,000 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 11%, resulting in Chin Company receiving cash of $22,710,551.

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
	Discount on Bonds Payable
	Bonds Payable
2.	Interest Expense
	Discount on Bonds Payable
	Cash
3.	Interest Expense
	Discount on Bonds Payable

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 $22,710,551 rather than for the face amount of $23,600,000?
The market rate of interest is   the contract rate of interest.

Answer 1

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	22710551
	Discount on Bonds Payable	889449
	Bonds Payable		23600000
2.	Interest Expense	1249080
	Discount on Bonds Payable		69080
	Cash		1180000
3.	Interest Expense	1252880
	Discount on Bonds Payable		72880
	Cash		1180000

b) Interest expense = 1249080+1252880 = $2501960

c)  The market rate of interest is Higher than the contract rate of interest.