Question

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

On the first day of its fiscal year, Chin Company issued $22,700,000 of five-year, 11% 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 13%, resulting in Chin Company receiving cash of $21,068,225.

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.

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 $21,068,225 rather than for the face amount of $22,700,000?  
The market rate of interest is ___(greater than or less then )___ the contract rate of interest.

Answer 1

a
1
Cash	21068225
Discount on Bonds Payable	1631775
Bonds Payable		22700000
2
Interest Expense	1411678
Discount on Bonds Payable		163178	=1631775/5*6/12
Cash		1248500	=22700000*11%*6/12
3
Interest Expense	1411678
Discount on Bonds Payable		163178
Cash		1248500
b
Bond interest expense for the first year	2823356	or 2823355	=1411678+1411678
c
The market rate of interest is greater than the contract rate of interest.