Question

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

On the first day of its fiscal year, Chin Company issued $10,900,000 of five-year, 10% 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 $10,097,700.

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.

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 $10,097,700 rather than for the face amount of $10,900,000?
The market rate of interest is   the contract rate of interest.

Answer 1

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Part a
Date	Account	Debit	Credit
1	Cash	$    10,097,700
	Discount on Bond Payable	$          802,300
	Bond Payable		$    10,900,000
	(To record issuance of bond)
2	Interest Expense	$          625,230
	Discount on Bond Payable ($802,300/10)		$            80,230
	Cash ($1,0900,000*5%)		$          545,000
	(To record first semiannual interest payment)
3	Interest Expense	$          625,230
	Discount on Bond Payable ($802,300/10)		$            80,230
	Cash ($1,0900,000*5%)		$          545,000
	(To record Second semiannual interest payment)
Part b	Bond Interest Expense for 1st year	$          625,230
	(From Entry no 2)
Part c	More
	Since market rate of interest was more than given rate, bonds were able
	to fetch less than face value.