Question

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

On the first day of its fiscal year, Chin Company issued $17,400,000 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 14%, resulting in Chin Company receiving cash of $16,177,908.

accounts payable/bonds payable/cash/interest expense/interest payable/premium on bonds payable/discount on bonds payable/

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.		fill in the blank 1cafb5094fde042_2	fill in the blank 1cafb5094fde042_3
		fill in the blank 1cafb5094fde042_5	fill in the blank 1cafb5094fde042_6
		fill in the blank 1cafb5094fde042_8	fill in the blank 1cafb5094fde042_9
2.		fill in the blank 1cafb5094fde042_11	fill in the blank 1cafb5094fde042_12
		fill in the blank 1cafb5094fde042_14	fill in the blank 1cafb5094fde042_15
		fill in the blank 1cafb5094fde042_17	fill in the blank 1cafb5094fde042_18
3.		fill in the blank 1cafb5094fde042_20	fill in the blank 1cafb5094fde042_21
		fill in the blank 1cafb5094fde042_23	fill in the blank 1cafb5094fde042_24
		fill in the blank 1cafb5094fde042_26	fill in the blank 1cafb5094fde042_27

b. Determine the amount of the bond interest expense for the first year.
$fill in the blank c806ab06305807e_1

c. Why was the company able to issue the bonds for only $16,177,908 rather than for the face amount of $17,400,000?
The market rate of interest is (greater than or less than) the contract rate of interest.

Answer 1

a
1
Cash	16177908
Discount on Bonds Payable	1222092
Bonds Payable		17400000
2
Interest Expense	1166209
Discount on Bonds Payable		122209	=1222092/5*6/12
Cash		1044000	=17400000*12%*6/12
3
Interest Expense	1166209
Discount on Bonds Payable		122209
Cash		1044000
b
Bond interest expense for the first year	2332418		=1166209+1166209
c
The market rate of interest is greater than the contract rate of interest.