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

On the first day of its fiscal year, Jacinto Company issued $6,500,000 of six-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 Jacinto Company receiving cash of $6,194,985.

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.
3. Second semiannual interest payment. The bond discount amortization is combined with the semiannual interest payment.

If an amount box does not require an entry, leave it blank. Round your answers to the nearest dollar.

1.	Cash
	Discount on Bonds Payable
	Bonds Payable
2.	Interest Expense
	Discount on Bonds Payable
	Cash
3.	Interest Expense
	Discount on Bonds Payable
	Cash

b. Determine the amount of the bond interest expense for the first year. Round your answer to the nearest dollar. $_____ c. Why was the company able to issue the bonds for only $6,194,985 rather than for the face amount of $6,500,000?

The market rate of interest is _________ the contract rate of interest.