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

Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $18,000,000 of five-year, 12% 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 14%, resulting in Chin Company receiving cash of $16,735,766. 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 $16,735,766 rather than for the face amount of $18,000,000? The market rate of interest is the contract rate of interest.

Explanation / Answer

Maturity amount of Bonds payable 18,000,000 Issue price 16,735,766 Total Discount on bonds payable 1,264,234 Number of semi-annual period of interest 10 Discount amortized each period 126423.4 Cash interest semi annually (18000,000*12%*6/12) 1080000 Journal entries: Date Accounts title and explanations Debit $ Credit $ a. Cash account Dr. 16735766 Discount on bonds payable Dr. 1264234    Bonds payable account 18,000,000 b. Interest expense Account Dr. 1206423     Cash account 1080000     Discount on bonds payable Account 126423.4 c. Interest expense Account Dr. 1206423     Cash account 1080000     Discount on bonds payable Account 126423.4 Req b. Total Interest expense for first year Cash interest paid (1080000+1080000) 2160000 Add: Discount amortized (126423.4*2) 252846.8 Total Interest expense for first year 2412847 Req c: The market rate of interest is equal to contract rate of interest.

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