Question

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

On the first day of its fiscal year, Chin Company issued $16,900,000 of five-year, 9% 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 11%, resulting in Chin receiving cash of $15,626,135.

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.

b. Determine the amount of the bond interest expense for the first year.

Answer 1

Solution:

Requirement:A

Date	Account Titles and Explanation	Debit	Credit
Jan. 1, Year 1	Cash	$      15,626,135
	Discount on Bands Payable	$        1,273,865
	Bonds Payable		$   16,900,000
	( To record bonds issue)
Date	Account Titles and Explanation	Debit	Credit
1st Interest , Year 1	Interest Expense	$            887,887
	Discount on Bonds Payable		$         127,387
	Cash		$         760,500
	( To record interest expense paid)
2nd Interest , Year 1	Interest Expense	$            887,887
	Discount on Bonds Payable		$         127,387
	Cash		$         760,500
	( To record interest expense paid)

Requirement:B

Amount of the bond interest expense for the first year = $ 887,887 + $ 887,887 = $ 1,775,774

Working: Amortization Table:

BOND DISCOUNT AMORTIZATION
STRAIGHT LINE METHOD-SEMIANNUAL INTEREST PAYMENTS
Semi-Annual Period	Cash Payment	Interest Expense	Discount Amortization	Carrying Value
Jan. 1, Year 1				$        15,626,135
1st Interest , Year 1	$              760,500	$                 887,887	$             127,387	$        15,753,522
2nd Interest, Year 1	$              760,500	$                 887,887	$             127,387	$        15,880,908
1st Interest , Year 2	$              760,500	$                 887,887	$             127,387	$        16,008,295
2nd Interest, Year 2	$              760,500	$                 887,887	$             127,387	$        16,135,681
1st Interest , Year 3	$              760,500	$                 887,887	$             127,387	$        16,263,068
2nd Interest, Year 3	$              760,500	$                 887,887	$             127,387	$        16,390,454
1st Interest , Year 4	$              760,500	$                 887,887	$             127,387	$        16,517,841
2nd Interest, Year 4	$              760,500	$                 887,887	$             127,387	$        16,645,227
1st Interest , Year 5	$              760,500	$                 887,887	$             127,387	$        16,772,614
2nd Interest, Year 5	$              760,500	$                 887,887	$             127,387	$        16,900,000