Question

On the first day of its fiscal 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 semi-annually. The bonds were issued at a market (effective) interest rate of 8%, resulting in Chin receiving cash of $9,594,415.
A. Journalize the entries to record the following:
1. Issuance of the bonds.
2. First semi-annual interest payment. The bond discount is combined with the semi-annual interest payment.
3. Second semi-annual interest payment. The bond discount is combined with the semi-annual interest payment.
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 exist9, 594, 415 rather than for the face amount of exist10,000,000? .

Answer 1

Answer:

The description for problem is listed throughout the section there on the explanations.

Explanation:

(A)...

(1) Prepare your entry in the report to document the bonds issuance.

To track or record bond issues, debit card wallet, debit discount, including credit bond liable as seen below:

Date                  Account title                     Debit                Credit

1st Jan                    Cash                           $9594415                  -

                 Bond payable discount          $405585  

                                Payable bond                              $10000000

(2) Arrange the entry to report the first half yearly interest payment

For report semi-annual interest charges, departmental interest cost, credit discounts on bonds payable as well as credit cash as can be seen here:

Date                  Account title                     Debit                Credit

30th June       Interest expense               $390559                   -

                  Bond payable discount                -                 $40559

                 Cash (10000000×3.5%)                                 $350000

(3) Arrange the entry to report the Second half yearly interest payment

For report semi-annual interest charges, departmental interest cost, credit discounts on bonds payable as well as credit cash as can be seen here:

Date                  Account title                     Debit                Credit

31st Dec       Interest expense                  $390559                   -

                  Bond payable discount                -                  $40559

                             Cash                                                    $350000

(B)...

Evaluate the sum of first year bond interest.

Particulars                                                        Amounts

Interest expense (350000+350000)             $700,000

Amortized discount (40559+40559)                $81,117

For the first year, Interest expense                  $781,117

(C)...

The corporation sold the bond for $9,594,415 with a maximum interest of $10,000,000. That would be the $405,585 bond is sold cheaply. The debt are heavily discounted because bond market value is greater than that of the coupon price mostly on debt.