Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $20,900,000 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 13%, resulting in Chin Company receiving cash of $19,397,617. 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. 2 3. DO DO

Answer 1

Working Notes:
	Calculation of interest amount and amortized amount
	Par Value of the bonds =	$              2,09,00,000
	Issue price of the bond =	$              1,93,97,617
	Discount on Purchase of Bonds	$                 15,02,383
	Coupon rate =		11%
	Coupon amount = (Par value X Coupon rate)	$                 22,99,000
	Half yearly Coupon Rate	$                 11,49,500
	Discount on Purchase of Bonds	$                 15,02,383
	Divide By		"/" By
	Life of the Bonds	5	years
	Period in Bonds (5 Years X 2)	10	Periods
	Discount to be amortized per Period =	1,50,238	Per Periods
	Calculation of interest expenses Per Period
		Coupont Amount Receieved	$11,49,500
		Add: Discount amortized	$1,50,238
		Interest Expenses Per Period	$12,99,738
SOLUTION: A
	Journal Entries
	Transactin	Account Title and explanation	Debit	Credit
	1	Cash	$              1,93,97,617
		Discount on Issuance of Bonds	$                 15,02,383
		Bonds Payable		$        2,09,00,000
		(To record the issuance of Bonds)
	2	Interest Expenses	$                 12,99,738
		Cash		$           11,49,500
		Discount on issuance of Bonds		$              1,50,238
		(To record the interest Expenses of first Semi Annual)
	3	Interest Expenses	$                 12,99,738
		Cash		$           11,49,500
		Discount on issuance of Bonds		$              1,50,238
		(To record the interest Expenses of second Semi Annual)
	SOLUTION: B
		Calculation of Bonds interest expenses of first year
		Interest Expenses of First Semi- Annual =	$                 12,99,738
		Interest Expenses of Second Semi- Annual =	$                 12,99,738
		Total of Interest Expenses	$                 25,99,477
		Answer = $ 2,599,477
	SOLUTION: C
		The Market rate of interest is Higher the contract rate of interest
		Answer = Higher