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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. 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. Round your answer to the nearest dollar. 3. Second semiannual interest payment. The bond discount amortization is combined with the semiannual interest payment. Round your answer to the nearest dollar. b. Determine the amount of the bond interest expense for the first year. 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.

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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Chapter
Section
BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 6E
Textbook Problem
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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

Prepare journal entry to record issuance of the bonds.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued 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.

Prepare journal entry for issuance of bonds payable.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
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)

  • Cash is an asset and it is increased...

2.

To determine

Prepare journal entry to record first interest payment and amortization of discount on bonds.

3.

To determine

Prepare journal entry to record second interest payment and amortization of discount on bonds.

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Chapter 14 Solutions

Financial Accounting
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