Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $27,200,000 of five-year, 4% 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 6%, resulting in Chin receiving cash of $24,879,677. a. Journalize the entries to record the following: Issuance of the bonds. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.) 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.

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 $24,879,677 rather than for the face amount of $27,200,000? The market rate of interest is (greater than or less than) the contract rate of interest. Therefore, inventors ( are or are not ) willing to pay the full face amount of the bonds.

Answer 1

SOLUTION

1.

S.No.	Accounts title and explanation	Debit ($)	Credit ($)
1.	Cash account	24,879,677
	Discount on bonds payable	2,320,323
	Bonds Payable		27,200,000
2.	Interest expenses	776,032
	Cash (27,200,000*4%*6/12)		544,000
	Discount on bonds payable (2,320,323/10)		232,032
3.	Interest expenses	776,032
	Cash (27,200,000*4%*6/12)		544,000
	Discount on bonds payable (2,320,323/10)		232,032

2. Total interest expense = 776,032 + 776,032 = 1,552,064

3. When the Market rate prevalent in market is morre than the stated rate, then the bonds will be issued at discount.