Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method
On the first day of its fiscal year, Chin Company issued $14,300,000 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 $13,168,515.
a. Journalize the entries to record the following:
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 $13,168,515 rather than for the face amount of
$14,300,000?
The market rate of interest is the contract rate of interest.
a | ||||
1 | Cash | 13168515 | ||
Discount on Bonds payable | 1131485 | |||
Bonds payable | 14300000 | |||
2 | Interest expense | 613649 | ||
Discount on Bonds payable | 113149 | =1131485/5*6/12 | ||
Cash | 500500 | =14300000*7%*6/12 | ||
3 | Interest expense | 613649 | ||
Discount on Bonds payable | 113149 | |||
Cash | 500500 | |||
b | ||||
Bond interest expense for the first year | 1227298 | =613649+613649 | ||
c | ||||
The market rate of interest is greater than the contract rate of interest |
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