Question

On the first day of its fiscal year, Chin Company issued $26,200,000 of five-year, 6% 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 7%, resulting in Chin receiving cash of $25,110,559.

a. Journalize the entries to record the following:

1. Issuance of the bonds.
2. First semiannual interest payment. The bond discount amortization is combined with the semiannual interest payment. Round your answer to the nearest dollar.
3. Second semiannual interest payment. The bond discount amortization 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

a. 1). Preparing the journal entry to record the issuance of bonds.

Date Account title Debit ($) Credit ($)

Jan 1 Cash 25,110,559

Discount on bonds payable 1,089,441

Bonds payable 26,200,000

a. 2). Preparing the journal entry to record the first semi annual interest payment.

Date Account title Debit ($) Credit ($)

Jun 30 Interest expense 390559

Discount on the bonds payable 108,945

Cash ($26,200,000 x 3%) 786,000

a.3). Preparing the journal entry to record the second semi-annually interest payment.

Date Account title Debit ($) Credit ($)

Dec 31 Interest expense 390,559

Discount on bonds payable 108,945

Cash 786,000

b). Determining the amount of bond interest expense for the 1st year.

Particulars Amount ($)

Interest expense ( 786,000 + 786,000 ) 1,572,000

Add : Discount amortized (108,945 + 108,945) 217,890

Interest expense (for the 1st year) 1,789,890

c). The company issued the bonds having face value of $26,200,000 for $25,110,559. That is the bonds are issued at a discount for $1,089,441. The bonds are issued at a discount as the market interest of the bonds are higher than the bonds coupon rate.