Question

eBook Show Me How Calculator Print Item Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $13,900,000 of five-year, 8% 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 9%, resulting in Chin Company receiving cash of $13,350,099 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. Why was the company able to issue the bonds for only $13,350,099 rather than for the face amount of $13,900,000 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	$13,350,099.00
	Discount on bond payable Dr	$549,901.00
	To Bond payable		$13,900,000.00
	(To record issue of bond at discount)
2	Interest Expense Dr	$610,990.00
	To Discount on bond payable ($549,901/10)		$54,990.00
	To Cash ($13,900,000*4%)		$556,000.00
	(Being first semiannual interest payment made and discount amortized)
3	Interest Expense Dr	$610,990.00
	To Discount on bond payable ($549,901/10)		$54,990.00
	To Cash ($13,900,000*4%)		$556,000.00
	(Being 2nd semiannual interest payment made and discount amortized)

solution b:

Interest expense for first year = $610,990 + $610,990 = $1,221,980

Solution c:

The bonds sell for less than their face amount because the market rate of interest is higher than the contract rate of interest