on the first day of it's fiscal year, chin company
issued $26,700,000 of 5 year, 10% bonds to finance it's operations
of producing and selling home improvement products . interest is
payable semi-annually. the bonds were issued at a market
(effective) interest rate of 12%,resulting in chim company
receiving cash of $24,734,733.
a. journalize the entries to record the following. :
1. issuance of bonds
2. first semiannual interest payment. the bond discount
amortization, using straight line method, is combined with the
semiannual interest payment.
3. second semiannual interest payment. the bond discount
amortization, using straight line, is combined with the semiannual
interest payment.
b. determine the amount of the bond interest expense for first
year.
c. why was the company able to issue the bonds for only $24,734,733
rather than face amount $26,700,000?
the market rate of interest is the contract rate of interest.
Face Value of Bonds = $26,700,000
Issue Value of Bonds = $24,734,733
Discount on Bonds = Face Value of Bonds - Issue Value of
Bonds
Discount on Bonds = $26,700,000 - $24,734,733
Discount on Bonds = $1,965,267
Annual Coupon Rate = 10%
Semiannual Coupon Rate = 5%
Semiannual Coupon = 5% * $26,700,000
Semiannual Coupon = $1,335,000
Time to Maturity = 5 years
Semiannual Period = 10
Semiannual Amortization of Discount = Discount on Bonds /
Semiannual Period
Semiannual Amortization of Discount = $1,965,267 / 10
Semiannual Amortization of Discount = $196,526.70
Semiannual Interest Expense = Semiannual Coupon + Semiannual
Amortization of Discount
Semiannual Interest Expense = $1,335,000.00 + $196,526.70
Semiannual Interest Expense = $1,531,526.70
Answer a.
Answer b.
Interest expense for first year is $3,063,053.40 ($1,531,526.70 + $1,531,526.70)
Answer c.
The market rate of interest is higher than the contract rate of interest.
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