Question

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Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $24,400,000 of five-year, 5% 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 7%, resulting in Chin receiving cash of $22,370,780. a. Journalize the entries to record the following: 1. Issuance of the bonds. 2. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.) 3. Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.) If an amount box does not require an entry, leave it blank. Round your answers to the nearest dollar 1. 111 il 2. 3. b. Determine the amount of the bond interest expense for the first year, Previous Next

Answer 1

Par value of bonds issued		2,44,00,000
Less: Issue price of bonds		2,23,70,780
Total Discount			20,29,220
Divide: Number of periods		10
Discount amortized each period		2,02,922
Semi-annual cash interest = 24400,000 *5%*6/12 =	6,10,000
Journal entries
S.no.	Accounts title and explanations		Debit $	Credit $
a.	Cash account			2,23,70,780
	Discount on bonds payable		20,29,220
	Bonds payable				2,44,00,000
	(for issuance of bonds)
b.	Interest expense			8,12,922
	Cash account				6,10,000
	Discount on bonds payable			2,02,922
	(for interest expense paid)
c.	Interest expense			8,12,922
	Cash account				6,10,000
	Discount on bonds payable			2,02,922
	(for interest expense paid)
Req b.
Interest expense for the first year:
Interest expense for first period		8,12,922
Interest expense for the second period	8,12,922
Interest expense for the first year:	16,25,844
Req c.
The market rate of interest is higher than contract rate fo interest.
Therefore, investors are not willing to pay the full face amount of the bonds