Question

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

On the first day of its fiscal interest rate of 8%, resulting in Chin Company receiving cash of $9,504,415. 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 marknt (e 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
3. Second semiannual interest payment. The bond discount amortization, using the straight line For a compound transaction, if an amount box does not require an entry, leave combined with the semiannual interest payment. (Round your answer to the nearest dollar.) method, is combined with the semiannual interest payment. (Round your answer to the nearest dollar ) it blank. Round your answers to the nearest dollar 1. Cash ________
Discount on Bonds Payable ________
Bonds Payable ________

Answer 1

The question involves the process of issuing bonds, paying interest, and understanding the amortization of bond discounts. It also touches upon the present value calculations for bonds with changing interest rates and the rights of bondholders if a company defaults on its bond obligations.

Step-by-step explanation:

The question focuses on the accounting entries for issuing bonds and the straight-line method of amortizing a discount on bonds payable. To determine the present value of a bond, you must discount the future cash flows (interest and principal payments) to their present value using the given discount rate.

Let's consider a two-year bond issued for $3,000 at an interest rate of 8%. It pays an annual interest of $240 (3,000 × 8%). To find its present value with a discount rate of 8%, we apply the present value formula for each payment and sum them up. This process is repeated using a discount rate of 11% if the interest rates rise.

For example, if a company issued bonds totaling $10 million at an 8% annual interest rate payable over 10 years, the company must pay $800,000 in interest each year. If it defaults on the payments, bondholders can take legal action to recoup their loans, although they may not recover the full amount if the company lacks the assets to do so.