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: 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. Cash 24,879,677 Discognt on Bonds Payable 2,320,323 Bonds Payable 27,200,000 1. 2. Interest Expense 776,032 Discount on Bonds Payable 544.000 x Cash 232,032 X 3. Interest Expense 776,032 Discount on Bonds Payable 544,000 x Cash 232,032 X Feedback Check My Work Bonds Pavable is always rernded at fara value Any difference in learnire le reflected in a premium or discount ac nunt. The stralaht-line method of

Answer 1

Journal entry

Particulars	Debit	Credit
1)Cash a/c Dr Discount on bond a/c Dr To Bond payble (Bond issued at discount)	24879677 2320323	27200000
Profit and loss ac Dr Interest	746390	746390
2)Interest expense a/c Dr To Discount on bond payable To   Cash (interest payment of first quarter)	746390	202390 544000
Profit and loss ac Dr Interest	746390	746390
3)Interest expense a/c Dr To Discount on bond payable To   Cash (interest payment of second quarter)	746390	202390 544000

Notes:

1.Discount on bond

Bond payble =27200000

Cash received =24879677

Total discount oayble =2320323

2.Calculations for Semi-Annual Period : Stated rate or

the annual nominal interest rate on the bond = 4%

. Since interest is payable semi-annually, periodic

interest rate of the bond = stated rate/2 = 10%/2 = 2%

Amount of interest payable every semi-annual period = 27200000*0.02 = 544000

Market value (or book value) of the bond at the

beginning of the first period = $24879677

Nominal (annual) market interest rate = 6%.

Again, effective market interest rate for the

semi-annual period = 6%/2 = 3%

Amount of interest on the market value of the bond

for the first semi-annual period = 24879677*0.03 = 746390

Here is an interesting fact about the interest on the bond. You are required to pay only $544000 to the bondholder every semi-annual period, but you are allowed to deduct the amount of $746390 as an interest expense in determining the Net Income of the company. The extra amount of interest expense you are allowed to deduct is the amount that is set aside so that it can be used to increase the book value of the bond and reduce the amount of discount. Extra interest deductible on the Income Statement = 746390  − 544000 = 202390

Book value of the bond at the end of the first period = $24879677+202390   = 25082067