Question

On the first day of its fiscal year, Chin Company issued $24,400,000 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 receiving cash of $22,318,534.

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. Round your answers to the nearest dollar.

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 $22,318,534 rather than for the face amount of $24,400,000?
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) Journal Entries (Amounts in $)

No.	Account Titles and Explanations	Debit	Credit
1.	Cash	22,318,534
	Discount on Bonds Payable (Bal. fig) (24,400,000-22,318,534)	2,081,466
	Bonds Payable		24,400,000
	(To record the issuance of bonds)
2.	Interest Expense ($22,318,534*6%*6/12)	669,556
	Discount on Bonds Payable (669,556 - 448,000)		181,556
	Cash ($24,400,000*4%*6/12)		448,000
	(To record the first interest payment)
3.	Interest Expense [(22,318,534+181,556)*6%*6/12]	675,003
	Discount on Bonds Payable (675,003 - 448,000)		227,003
	Cash ($24,400,000*4%*6/12)		448,000
	(To record the second interest payment)

b) Bond interest expense for first year = $669,556+$675,003 = $1,344,559

c) The market value of interest (i.e. 6%) is less than the rate of interest on bonds (i.e. 4%). Therefore, investors willing to pay less than the face value of the bonds.