Question

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

On the first day of its fiscal year, Chin Company issued $22,800,000 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 12%, resulting in Chin Company receiving cash of $21,960,845.

a. Journalize the entries to record the following:

1. Issuance of the bonds.
2. 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.)
3. 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.

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

Answer 1

No.	Account Titles and Explanations	Debit	Credit
1	Cash	$ 21,960,845
	Discount on Bonds Payable - Bal. Fig.	$ 839,155
	Bonds Payable		$ 22,800,000
	(To record the issuance of the Bonds )
2	Interest Expense	$ 1,337,916
	Discount on Bonds Payable                          ( $ 839,155 / 5x 2)		$ 83,916
	Cash                     ( $ 22,800,000 x 11% x 6/12)		$ 1,254,000
	(To record the First semiannual interest payment)
3	Interest Expense	$ 1,337,916
	Discount on Bonds Payable                          ( $ 839,155 / 5x 2)		$ 83,916
	Cash                     ( $ 22,800,000 x 11% x 6/12)		$ 1,254,000
	(To record the Second semiannual interest payment)

b)
Amount of the bond interest expense for the first year             = $ 1,337,916 x 2	$ 2,675,832