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

On the first day of its fiscal year, Chin Company issued $10,600,000 of five-year, 9% 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 11%, resulting in Chin Company receiving cash of $9,801,008.

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 $9,801,008 rather than for the face amount of $10,600,000? The market rate of interest is the contract rate of interest.

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

Daan Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Daan Corporation issued $4,400,000 of 6-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $4,825,187. Interest is payable semiannually on April 1 and October 1.

a. Journalize the entry to record the issuance of bonds on April 1, 2016. For a compound transaction, 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, 2016, and amortization of bond premium for six months, using the straight-line method. The bond premium amortization is combined with the semiannual interest payment. (Round to the nearest dollar.) For a compound transaction, if an amount box does not require an entry, leave it blank.

c. Why was the company able to issue the bonds for $4,825,187 rather than for the face amount of $4,400,000?

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