Entries for issuing bonds and amortizing discount by straight-line method
On the first day of its fiscal year, Chin Company issued $29,300,000 of 5-year, 9% 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 10%, resulting in Chin receiving cash of $28,168,664.
Question Content Area
a. Journalize the entries to record the following:
- Issuance of the bonds.
- First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
- Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
If an amount box does not require an entry, leave it blank.
| Entries | Account | Debit | Credit |
|---|---|---|---|
| 1. | Accounts PayableBonds PayableCashInterest ExpensePremium on Bonds PayableCash | Cash | Cash |
| Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpensePremium on Bonds PayableDiscount on Bonds Payable | Discount on Bonds Payable | Discount on Bonds Payable | |
| Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpensePremium on Bonds PayableBonds Payable | Bonds Payable | Bonds Payable | |
| 2. | Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayableInterest Expense | Interest Expense | Interest Expense |
| Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayableDiscount on Bonds Payable | Discount on Bonds Payable | Discount on Bonds Payable | |
| Bonds PayableCashInterest ExpenseInterest PayablePremium on Bonds PayableCash | Cash | Cash | |
| 3. | Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayableInterest Expense | Interest Expense | Interest Expense |
| Accounts PayableBonds PayableDiscount on Bonds PayableInterest ExpenseInterest PayableDiscount on Bonds Payable | Discount on Bonds Payable | Discount on Bonds Payable | |
| Bonds PayableCashInterest ExpenseInterest PayablePremium on Bonds PayableCash | Cash | Cash |
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Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account. The straight-line method of amortization provides equal amounts of amortization over the life of the bond.
Question Content Area
b. Determine the amount of the bond interest expense for the first year.
fill in the blank 1 of 1$
c. Why was the company able to issue the bonds for only $28,168,664 rather than for the face amount of $29,300,000?
The market rate of interest is fill in the blank 1 of 2
greater than less thangreater than
the contract rate of interest. Therefore, inventors fill in the blank 2 of 2
areare notare not
willing to pay the full face amount of the bonds.
It’s that simple.Pay only when you are satisfied.
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