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.

Solution :

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.

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