Question

On the first day of its fiscal year, Chin Company issued $21,000,000 of five-year, 8% bonds...

On the first day of its fiscal year, Chin Company issued $21,000,000 of five-year, 8% 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 10%, resulting in Chin Company receiving cash of $19,378,363.

Part 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.

Part B: Determine the amount of the bond interest expense for the first year.

Part C: Why was the company able to issue the bonds for only $19,378,363 rather than for the face amount of $21,000,000?
The market rate of interest is____________ the contract rate of interest. (Greater Than/Less Than)

Business   Accounting   
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Homework Answers

Answer #1

Bond is a fixed income security in which issuer promises pay a series of interest payment and repay the principle on maturity to the investor. Where the market rate is higher/Lower than the stated interest rate, then the bonds were issued at discount/ premium. In straight line amortization, the premium received or discount given on issue of bond is amortized over the bond period maturity on straight line basis. Formula is (Discount / Premium Amount) divided by bond period.

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