Question

On the first day of its fiscal year, Chin Company issued $21,700,000 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 Company receiving cash of $19,848,860.

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.

1. - 011 III III III

Answer 1

Solution a:

Journal Entries - Chin Company
Event	Particulars	Debit	Credit
1	Cash Dr	$19,848,860.00
	Discount on bond payable Dr	$1,851,140.00
	To Bond payable		$21,700,000.00
	(To record issue of bond at discount)
2	Interest Expense Dr	$619,114.00
	To Discount on bond payable ($1,851,140/10)		$185,114.00
	To Cash ($21,700,000*2%)		$434,000.00
	(Being first semiannual interest payment made and discount amortized)
3	Interest Expense Dr	$619,114.00
	To Discount on bond payable ($1,851,140/10)		$185,114.00
	To Cash ($21,700,000*2%)		$434,000.00
	(Being 2nd semiannual interest payment made and discount amortized)

Solution b:

Interest expense for first year = $619,114 + $619,114 = $1,238,228

Solution c:

The bonds sell for less than their face amount because the market rate of interest is higher than the contract rate of interest.