Question

Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $27,300,000 of five-year, 12% 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 14%, resulting in Chin Company receiving cash of $25,382,579. 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.

Answer 1

Working Notes:
	Calculation of interest amount and amortized amount
	Par Value of the bonds =	$              2,73,00,000
	Issue price of the bond =	$              2,53,82,579
	Discount on Purchase of Bonds	$                 19,17,421
	Coupon rate =		12%
	Coupon amount = (Par value X Coupon rate)	$                 32,76,000
	Half yearly Coupon Rate	$                 16,38,000
	Discount on Purchase of Bonds	$                 19,17,421
	Divide By		"/" By
	Life of the Bonds	5	years
	Period in Bonds (5 Years X 2)	10	Periods
	Discount to be amortized per Period =	1,91,742	Per Periods
	Calculation of interest expenses Per Period
		Coupont Amount Receieved	$16,38,000
		Add: Discount amortized	$1,91,742
		Interest Expenses Per Period	$18,29,742
SOLUTION: A
	Journal Entries
	Transactin	Account Title and explanation	Debit	Credit
	1	Cash	$              2,53,82,579
		Discount on Issuance of Bonds	$                 19,17,421
		Bonds Payable		$        2,73,00,000
		(To record the issuance of Bonds)
	2	Interest Expenses	$                 18,29,742
		Cash		$           16,38,000
		Discount on issuance of Bonds		$              1,91,742
		(To record the interest Expenses of first Semi Annual)
	3	Interest Expenses	$                 18,29,742
		Cash		$           16,38,000
		Discount on issuance of Bonds		$              1,91,742
		(To record the interest Expenses of second Semi Annual)
	SOLUTION: B
		Calculation of Bonds interest expenses of first year
		Interest Expenses of First Semi- Annual =	$                 18,29,742
		Interest Expenses of Second Semi- Annual =	$                 18,29,742
		Total of Interest Expenses	$                 36,59,484
		Answer = $ 3,659,484
	SOLUTION: C
		The Market rate of interest is Higher the contract rate of interest
		Answer = Higher