Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $28,100,000 of five-year, 6% 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 Company receiving cash of $25,820,725. 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 $25,820,725 rather than for the face amount of $28,100,000? The market rate of interest is the contract rate of interest.

Answer 1

Solution a:

Journal Entries - Chin Company
Event	Particulars	Debit	Credit
1	Cash Dr	$25,820,725.00
	Discount on bond Dr	$2,279,275.00
	To Bond Payable		$28,100,000.00
	(To record issue of bond at discount)
2	Interest Expense Dr	$1,070,928.00
	To Discount on bond		$227,928.00
	To Cash		$843,000.00
	(To record semiannual interest payment and discount amortization)
3	Interest Expense Dr	$1,070,928.00
	To Discount on bond		$227,928.00
	To Cash		$843,000.00
	(To record semiannual interest payment and discount amortization)

Solution b:

Amount of bond interest expense for the first year = $1,070,928 * 2 = $2,141,856

Solution c:

The company able to issue the bonds for only $25,820,725 rather than for the face amount of $28,100,000 because market rate of interest was higher than coupon rate offereed by the company for bond with similar risk and maturity, This is th main reason company is not able to get the complete face value of bond.