Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $14,700,000 of five-year, 12% 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 13%, resulting in Chin Company receiving cash of $14,171,679. 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. III III III III III 3

Answer 1

a.

1	Cash	14171679
	Discount on bonds payable	528321
	Bonds payable		14700000
2	Interest expense	934832
	Discount on bonds payable ($528321/10)		52832
	Cash ($14700000 x 12% x 6/12)		882000
3	Interest expense	934832
	Discount on bonds payable ($528321/10)		52832
	Cash ($14700000 x 12% x 6/12)		882000

b. Bond interest expense = $934832 x 2 = $1869664

c. The market rate of interest is higher than the contract rate of interest.