Question

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

On the first day of its fiscal year, Chin Company issued $29,800,000 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 receiving cash of $27,657,846.

a. Journalize the entries to record the following:

1. Issuance of the bonds.
2. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
3. 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 $27,657,846 rather than for the face amount of $29,800,000?
The market rate of interest is ____________ the contract rate of interest. Therefore, inventors ___________ willing to pay the full face amount of the bonds.

Answer 1

Solution:

Date	Particulars	Debit	Credit
1	Cash A/c Dr ($14,000,000*95%)	$2,76,57,846
	Discount on Bond Payable Dr	$21,42,154
	To bonds payable		$2,98,00,000
2	Interest Expense Dr ($27657846*13%*6/12)	$17,97,760
	To Discount on Bond Payable ($700,000/5*6/12)		$1,58,760
	To Cash ($29,800,000*11%*6/12)		$16,39,000
3	Interest Expense Dr [($27657846+158760)*13%*6/12]	$18,08,079
	To Discount on Bond Payable ($700,000/5*6/12)		$1,69,079
	To Cash ($29,800,000*11%*6/12)		$16,39,000

Solutin b:

Amount of the bond interest expense for the first year = 1797760 + 1808079 = $3,605,839

Solution c:

The market rate of interest is More than the contract rate of interest. Therefore, inventors not willing to pay the full face amount of the bonds.