Question

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

On the first day of its fiscal year, Chin Company issued $24,000,000 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 $22,146,701.

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.	Cash
	Discount on Bonds Payable
	Bonds Payable
2.	Interest Expense
	Discount on Bonds Payable
	Cash
3.	Interest Expense
	Discount on Bonds Payable
	Cash

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 $22,146,701 rather than for the face amount of $24,000,000?
The market rate of interest is greater than  the contract rate of interest.

Answer 1

a
1	Cash	22146701
	Discount on Bonds Payable	1853299
	Bonds Payable		24000000
2	Interest Expense	1145330
	Discount on Bonds Payable		185330	=1853299/5*6/12
	Cash		960000	=24000000*8%*6/12
3	Interest Expense	1145330
	Discount on Bonds Payable		185330
	Cash		960000
b
	Bond interest expense for the first year	2290660		=1145330+1145330
c
The market rate of interest is greater than the contract rate of interest.