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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Entries for issuing bonds and amortizing discount by straight-line method

On the first day of its fiscal year, Chin Company issued $10,000,000 of five-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 Chin Company receiving cash of $9,594,415.

  1. a. Journalize the entries to record the following:
    1. 1. Issuance of the bonds.
    2. 2. First semiannual interest payment. The bond discount amortization is combined with the semiannual interest payment. Round your answer to the nearest dollar.
    3. 3. Second semiannual interest payment. The bond discount amortization is combined with the semiannual interest payment. Round your answer to the nearest dollar.
  2. b. Determine the amount of the bond interest expense for the first year.
  3. 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.

a (1)

To determine

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Discount on bonds payable: It occurs when the bonds are issued at a low price than the face value.

To prepare: Journal entry to record issuance of the bonds.

Explanation

Prepare journal entry for issuance of bonds payable.

Date Account Title and Explanation Post Ref Debit ($) Credit ($)
Cash  9,594,415
Discount on Bonds Payable  (1) 405,585
Bonds Payable 10,000,000
(To record issuance of bonds payable at discount)

Table (1)

Working note:

Calculate discount on bonds payable...

2.

To determine

To prepare: Journal entry to record first interest payment and amortization of discount on bonds.

3.

To determine

To prepare: Journal entry to record second interest payment and amortization of discount on bonds.

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