Question

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

On the first day of its fiscal year, Chin Company issued $20,100,000 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 8%, resulting in Chin receiving cash of $19,284,774.

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 $19,284,774 rather than for the face amount of $20,100,000?
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

Face Value of Bonds = $20,100,000
Issue Value of Bonds = $19,284,774

Discount on Bonds = Face Value of Bonds - Issue Value of Bonds
Discount on Bonds = $20,100,000 - $19,284,774
Discount on Bonds = $815,226

Annual Coupon Rate = 7.00%
Semiannual Coupon Rate = 3.50%
Semiannual Coupon = 3.50% * $20,100,000
Semiannual Coupon = $703,500

Time to Maturity = 5 years
Semiannual Period = 10

Semiannual Amortization of Discount = Discount on Bonds / Semiannual Period
Semiannual Amortization of Discount = $815,226 / 10
Semiannual Amortization of Discount = $81,523

Semiannual Interest Expense = Semiannual Coupon + Semiannual Amortization of Discount
Semiannual Interest Expense = $703,500 + $81,523
Semiannual Interest Expense = $785,023

Answer a.

Answer b.

Interest Expense = $785,023 + $785,023
Interest Expense = $1,570,046

Answer c.

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