Question
In: Accounting
On the first day of its fiscal year, Chin Company issued $16,800,000 of five-year, 4% bonds...
On the first day of its fiscal year, Chin Company issued $16,800,000 of five-year, 4% 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 6%, resulting in Chin Company receiving cash of $15,366,859.
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 $15,366,859 rather than for the face amount of
$16,800,000?
The market rate of interest is the contract rate of interest.
Solutions
Expert Solution
| A) | Journal Entries | |||||||||
| Date | Account titles & Explanations | Debit | Credit | |||||||
| 1-Jan | Cash | 15,366,859 | ||||||||
| Discount on bonds payable | 1,433,141 | |||||||||
| Bonds payable | 16,800,000 | |||||||||
| 30-Jun | interest expense | 479314 | ||||||||
| discount on bonds payable | (1433141/10) | 143314 | ||||||||
| Cash | (16,800,000*4%*1/2) | 336000 | ||||||||
| 31-Dec | interest expense | 479314 | ||||||||
| discount on bonds payable | 143314 | |||||||||
| Cash | 336000 | |||||||||
| b) | Amount of interest expense for the year | 958628 | ||||||||
| c) | the market rate of 6% is higher than the contract rate of 4% | |||||||||
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