Question

g 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 semiannually. 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: 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. 1. 2. 3. b. Determine the amount of the bond interest expense for the first year. $ c. Why was the company able to issue the bonds for only $9,594,415 rather than for the face amount of $10,000,000? The market rate of interest is the contract rate of interest. Therefore, inventors wi

Answer 1

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

Total Years = 5, semiannually = 5 × 2 = 10

Rate = 7% yearly, semiannually rate = 7 ÷ 2 = 3.5%  

Journal Entries

On Jan 1

Cash A/c           Dr. $9,594,415

Discount on bonds payable A/c        Dr. $405,585

      To Bonds payable A/c          $10,000,000

(Being the issuance of bond payable is recorded)

Discount value of issued bonds = $10,000,000 - $9,594,415 = $405,585

2).

On Jun

Interest expenses A/c             Dr. $390,559

Discount on bonds payable A/c($405,585 ÷10)           Dr.40,559

 To Cash A/c($10,000,0000 × 3.5%)     $350,000

(Being the payment of first semiannual interest is recorded)

3).  

On Dec 31

Interest expenses A/c              Dr. $390,559

Discount on bonds payable A/c($405,585*10/100)     Dr.$40,559

 To Cash A/c($10,000,000*3.5/100)      $350,000

(Being the payment of second semiannual interest is recorded)

b). Bond Interest Expense Amount for First Year

= Interest Expenses + Amortized Discount

= $700,000 + $81,117

= $781,117

Interest expenses = $350,000 + $350,000 = $700,000

Amortized Discount = $40,559 + $40,559 = $81,117

c).The Company issued the bonds at $9,594,415 for the face amount of $10,000,000 because bonds issued at discount for $405,585 as the coupon rate is less than the market interest.