Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method

On the first day of its fiscal year, Chin Company issued $16,200,000 of five-year, 4% 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 6%, resulting in Chin Company receiving cash of $14,818,043.

a. Journalize the entries to record the following:

1. Issuance of the bonds.
2. First semiannual interest payment. The bond discount amortization, using the straight-line method, is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
3. Second semiannual interest payment. The bond discount amortization, using the straight-line method, is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)

For a compound transaction, if an amount box does not require an entry, leave it blank. Round your answers to the nearest dollar.

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 $14,818,043 rather than for the face amount of $16,200,000? The market rate of interest is the contract rate of interest.

2)

Times interest earned

The following data were taken from recent annual reports of Caliber Company, which operates a low-fare airline service to more than 50 cities in the United States:

	Current Year		Preceding Year
Interest expense	$65,000		$71,000
Income before income tax	409,500		319,500

a. Determine the times interest earned ratio for the current and preceding years. Round to one decimal place.

Current year
Preceding year

b. Although Caliber Company had enough earnings to pay interest in the preceding year, the in this ratio will be by the debtholders.