Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $15,300,000 of five-year, 10% 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 11%, resulting in Chin Company receiving cash of $14,723,366.

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. Cash Discount on Bonds Payable Bonds Payable

2. Interest Expense Discount on Bonds Payable Cash

3. Interest Expense Discount on Bonds Payable Cash

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 $14,723,366 rather than for the face amount of $15,300,000? The market rate of interest is greater than the contract rate of interest.

Answer 1

Journal entries:
Date	Accounts title and explanations				Debit $	Credit $
1	Cash account Dr.				14723366
	Discount on bonds payable Dr.				576634
	Bonds payable					15300000
2	Interest expense Dr.				822663
	Cash account		(15300000*10%*6/12)			765000
	Discount on bonds payable (576634/10)					57663
3	Interest expense Dr.				822663
	Cash account		(15300000*10%*6/12)			765000
	Discount on bonds payable (576634/10)					57663
Req b:
Total Interest expense fr Year-1 (822663+822663):					1645326
Req c:
As the market rate is greater than the contract rate of interest, therefore, the amount received is less than par value