Question

On January 1, the first day of its fiscal year, Chin Company issued $10,000,000 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 Company receiving cash of $9,594,415.

Required:

A.	Journalize the entries to record the following (refer to the Chart of Accounts for exact wording of account titles): 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.)
B.	Determine the amount of the bond interest expense for the first year.
C.	Explain why the company was able to issue the bonds for only $9,594,415 rather than for the face amount of $10,000,000.

Answer 1

Solution A:

Journal Entries - Chin Company
Event	Particulars	Debit	Credit
1	Cash Dr	$9,594,415.00
	Discount on bond payable Dr	$405,585.00
	To Bond Payable		$10,000,000.00
	(To record issue of bond at discount)
2	Interest expense Dr	$390,559.00
	To Cash		$350,000.00
	To Discount on bond payable ($405,585/10)		$40,559.00
	(To record first semiannual interest payment and discount amortized)
3	Interest expense Dr	$390,559.00
	To Cash		$350,000.00
	To Discount on bond payable		$40,559.00
	(To record 2nd semiannual interest payment and discount amortized)

Solutoin B:

Amount of bond interest expense for the first year = $390,559 + $390,559 = $781,118

Solution C:

As market interest rate is higher than interest rate offered by the company therefore in order to match the bond equivalent to market yield, bonds were issued at discount. Therefore company was able to issue the bonds for only $9,594,415 rather than for the face amount of $10,000,000