Question

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

On the first day of its fiscal year, Chin Company issued $22,000,000 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 receiving cash of $20,301,142.

a. Journalize the entries to record the following:

Issuance of the bonds.

First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)

Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)

If an amount box does not require an entry, leave it blank.

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 $20,301,142 rather than for the face amount of $22,000,000?
The market rate of interest is   the contract rate of interest. Therefore, inventors   willing to pay the full face amount of the bonds.

Check My Work

Answer 1

Journal entries
Date	Accounts title and explanations		Debit $	Credit $
a.	Cash account			20301142
	Discount on bonds payable		1698858
	Bonds payable				22000000
	(for bonds issued)
b.	Interest expense			10,49,886
	Cash account (22000,000*8%*6/12)		880000
	Discount on bonds payable (1698,858/10)	1,69,886
	(for interest expense)
c.	Interest expense			10,49,886
	Cash account (22000,000*8%*6/12)		880000
	Discount on bonds payable (1698,858/10)	1,69,886
	(for interest expense)
Bonds interest expense for Year-1 (1049,886+1049,886):	2099772
The market rate of interest is higher than contract rate.
Therefore, investors are no willing to pay the full amount.