Question

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

On the first day of its fiscal year, Chin Company issued $15,600,000 of five-year, 5% 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 Company receiving cash of $14,934,582.

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. ___________________ _______    _______

___________________ _______    _______

___________________ _______ _______

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 $14,934,582 rather than for the face amount of $15,600,000?

The market rate of interest is___________________ the contract rate of interest.

Answer 1

a) Journal entries:

No	account and explanation	debit	credit
1	Cash	14934582
	Discount on bonds payable	665418
	Bonds payable		15600000
	(To record bond issue)
2	Interest expense	456542
	Discount on bonds payable (665418/10)		66542
	Cash (15600000*5%*6/12)		390000
	(To record interest)
3	Interest expense	456542
	Discount on bonds payable		66542
	Cash		390000
	(To record interest)

b) First year bond interest expense = 456542*2 = $913084

c) The market rate of interest is higher than the contract rate of interest