Question

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

On the first day of its fiscal year, Chin Company issued $21,200,000 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 $19,522,554.

a. Journalize the entries to record the following:

Issuance of the bonds.

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.)

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 $19,522,554 rather than for the face amount of $21,200,000?
The market rate of interest is the contract rate of interest.

Answer 1

Answer a.

Face Value = $21,200,000
Proceed from Issue = $19,522,554

Discount on Issue = Face Value - Proceed from Issue
Discount on Issue = $21,200,000 - $19,522,554
Discount on Issue = $1,677,446

Annual Coupon Rate = 7%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50%*$21,200,000
Semiannual Coupon = $742,000

Time to Maturity = 5 years
Semiannual Period to Maturity = 10

Semiannual Amortization of Discount = Discount on Issue / Semiannual Period to Maturity
Semiannual Amortization of Discount = $1,677,446 / 10
Semiannual Amortization of Discount = $167,745

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $742,000 + $167,745
Semiannual Interest Expense = $909,745

Journal Entries:

Answer b.

Interest Expense in Year 1 = $909,745 * 2
Interest Expense in Year 1 = $1,819,490

Answer c.

The Market Rate of Interest is higher than the contract rate of interest.