2. EX.14-06.ALGO (Algorithmic) Entries for Issuing Bonds and Amortizing Discount

Question

2. EX.14-06.ALGO (Algorithmic) Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $12,000,000 of five-year, 7% 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 9%, resulting in Chin Company receiving cash of $11,050,502 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, s 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 $11,050,502 rather than for the face amount of $12,000,000? The market rate of interest is the contract rate of interest.

Explanation / Answer

b. Amount of bond interest expense for the first year: $325050 + $325050 = $650100

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

a. Account Titles and Explanation Debit Credit 1 Cash 11050502 Discount on Bonds Payable 949498 Bonds Payable 12000000 (To record issuance of bonds at discount) 2 Interest expense 325050 Discount on Bonds Payable ($949498/10) 94950 Cash ($12000000 x 7% x 1/2) 420000 (To record interest payment on bonds) 3 Interest expense 325050 Discount on Bonds Payable ($949498/10) 94950 Cash ($12000000 x 7% x 1/2) 420000 (To record interest payment on bonds)

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