Question

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

On the first day of its fiscal year, Chin Company issued $26,300,000 of five-year, 11% 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 12%, resulting in Chin receiving cash of $25,332,027.

a. Journalize the entries to record the following:

Issuance of the bonds.

First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)

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.

2.

3.

b. Determine the amount of the bond interest expense for the first year.
$

c. Why was the company able to issue the bonds for only $25,332,027 rather than for the face amount of $26,300,000?
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	25332027
	Discount on Bonds payable	967973
	Bonds payable		26300000
2	Interest expense	1543297
	Discount on Bonds payable		96797	=967973/10
	Cash		1446500	=26300000*11%/2
3	Interest expense	1543297
	Discount on Bonds payable		96797
	Cash		1446500
	b
	Bond interest expense	3086594 or	3086595	=1543297+1543297
	c
	The market rate of interest is greater the contract rate of interest. Therefore, inventors are not willing to pay the full face amount of the bonds.