Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $19,500,000 of five-year, 9% 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 $18,030,155. a. Journalize the entries to record the following: Issuance of the bonds. 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.) 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 18,030,155

Discount on Bonds Payable 1,469,845

Bonds Payable 19,500,000

2. Interest Expense

Discount on Bonds Payable  

Cash 877,500

3. Interest Expense

Discount on Bonds Payable

Cash 877,500  

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 $18,030,155 rather than for the face amount of $19,500,000? The market rate of interest is greater than the contract rate of interest.

I cant seem to figure out the interest expense, the discount on bonds payable or the bond interest expense for the first year.

Thank you so much.

Answer 1

a
1
Cash	18030155
Discount on Bonds Payable	1469845
Bonds Payable		19500000
2
Interest Expense	1024485
Discount on Bonds Payable		146985	=1469845/5*6/12
Cash		877500	=19500000*9%*6/12
3
Interest Expense	1024485
Discount on Bonds Payable		146985
Cash		877500

b
Bond interest expense for the first year	2048970	or 2048969	=1024485+1024485

c

The market rate of interest is greater than the contract rate of interest.