Entries for issuing bonds and amortizing discount by straight-line method On the first day of its fiscal year, Chin Company issued $21,600,000 of 5-year, 11% 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 13%, resulting in Chin receiving cash of $20,047,298. a. Journalize the entries to record the following: 1. Issuance of the bonds. 2. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.) 3. 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. Cash Discount on Bonds Payable Bonds Payable 2. Interest Expense Discount on Bonds Payable Cash 3. Interest Expense Discount on Bonds Payable Cash Feedback 20,047,298 V 21,600,000 x Check My Work 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. 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 $20,047,298 rather than for the face amount of $21,600,000? The market rate of interest is greater than the contract rate of interest. Therefore, inventors are not Feedback Check My Work willing to pay the full face amount of the bonds. b. Remember that the amortization of a bond discount or premium affects the amount of interest expenses recorded. c. Bonds will be issued for either a higher or lower amount than the face value when the market and contract rates of interest are different. Feedback Check My Work Partially correct Entries for issuing bonds and amortizing premium by straight-line method Smiley Company wholesales repair products to equipment manufacturers. On April 1, 20Y1, Smiley issued $4,700,000 of 10-year, 9% bonds at a market (effective) interest rate of 6%, receiving cash of $5,748,861. Interest is payable semiannually on April 1 and October 1. a. Journalize the entry to record the issuance of bonds on April 1, 20Y1. If an amount box does not require an entry, leave it blank. b. Journalize the entry to record the first interest payment on October 1, 20Y1, and amortization of bond premium for 6 months, using the straight-line method. Round to the nearest dollar. If an amount box does not require an entry, leave it blank. c. Why was the company able to issue the bonds for $5,748,861 rather than for the face amount of $4,700,000? The market rate of interest is the contract rate of interest. Entries for issuing and calling bonds; loss Hoover Company, a wholesaler of music equipment, issued $9,180,000 of 25-year, 9% callable bonds on March 1, 2012, at their face amount, with interest payable on March 1 and September 1. The fiscal year of the company is the calendar year. 20Y2 March 1 September 1 2014 September 1 Issued the bonds for cash at their face amount. Paid the interest on the bonds. Called the bond issue at 103, the rate provided in the bond indenture. (Omit entry for payment of interest.) If an amount box does not require an entry, leave it blank. Journalize the entries to record the above selected transactions. Issued the bonds for cash at their face amount. 2012 Mar. 1 Paid the interest on the bonds. 20Y2 Sept. 1 38 Called the bond issue at 103, the rate provided in the bond indenture. (Omit entry for payment of interest.) 2014 Sept. 1 Entries for issuing bonds Thomson Co. produces and distributes semiconductors for use by computer manufacturers. Thomson issued $240,000 of 10-year, 7% bonds on May 1 of the current year at face value, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year. May 1. Issued the bonds for cash at their face amount. November 1. Paid the interest on the bonds. December 31. Recorded accrued interest for 2 months. Journalize the entries to record the above selected transactions for the current year. If an amount box does not require an entry, leave it blank. May 1 Cash Bonds Payable 240,000 240,000 Nov. 1 Interest Expense 8,400 Cash 8,400 Dec. 31 Interest Expense Interest Payable Feedback 4,200 X 4,200 X Check My Work Bonds payable is always recorded at face value. The semi-annual cash payment to bondholders is the interest expense when bonds are sold at face value. As with notes payable, interest must be accrued for the period between the last interest payment period to the end of the fiscal year.