Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method

On the first day of its fiscal year, Chin Company issued $21,500,000 of five-year, 12% 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 13%, resulting in Chin receiving cash of $20,727,286.

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.

1.		fill in the blank ef503604c021fc0_2	fill in the blank ef503604c021fc0_3
		fill in the blank ef503604c021fc0_5	fill in the blank ef503604c021fc0_6
		fill in the blank ef503604c021fc0_8	fill in the blank ef503604c021fc0_9
2.		fill in the blank ef503604c021fc0_11	fill in the blank ef503604c021fc0_12
		fill in the blank ef503604c021fc0_14	fill in the blank ef503604c021fc0_15
		fill in the blank ef503604c021fc0_17	fill in the blank ef503604c021fc0_18
3.		fill in the blank ef503604c021fc0_20	fill in the blank ef503604c021fc0_21
		fill in the blank ef503604c021fc0_23	fill in the blank ef503604c021fc0_24
		fill in the blank ef503604c021fc0_26	fill in the blank ef503604c021fc0_27

b. Determine the amount of the bond interest expense for the first year.
$fill in the blank cf833c07d069f8f_1

c. Why was the company able to issue the bonds for only $20,727,286 rather than for the face amount of $21,500,000?
The market rate of interest is   the contract rate of interest. Therefore, inventors   willing to pay the full face amount of the bonds.

Answer 1

a
1
Cash	20727286
Discount on Bonds Payable	772714
Bonds Payable		21500000
2
Interest Expense	1367271
Discount on Bonds Payable		77271	=772714/5*6/12
Cash		1290000	=21500000*12%*6/12
3
Interest Expense	1367271
Discount on Bonds Payable		77271
Cash		1290000
b
Bond interest expense for the first year	2734542	or 2734543	=1367271+1367271
c
The market rate of interest is greater than the contract rate of interest.