Entries for Issuing Bonds and Amortizing Discount by Straight-Line Method On the first day of its fiscal year, Chin Company issued $18,600,000 of five-year, 10% 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 12%, resulting in Chin Company receiving cash of $17,230,938.
(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.

Answer and Explanation:

a. The Journal entry is shown below:-

1. Cash Dr, $17,230,938

   Bond payable discount Dr, $1,369,062

                   To Payable bond $18,600,000

(Being issuance of bonds is recorded)

2. Interest expenses Dr, $793,094

                   To discount on bonds payable $136,906   ($1,369,062 ÷ 10)

                   To Cash $930,000     ($18,600,000 × 10% ÷ 2)

(Being first semi annual interest is recorded)

3. Interest expense Dr, $793,094

              To Bond payable discount $136,906

              To Cash $930,000

(Being second semi annual interest is recorded)

b. Interest expenses for the first year = Interest expenses + Discount amortized

= ($930,000 + $930,000) + ($136,906 + $136,906)

= $1,860,000 + $273,812

= $2,133,812

c. The company issued the bond with a maximum interest of $10,000,000, for $9,594,415. That is the bonds are issued at a $1,369,062 discount. The bonds are issued at a discount because the bond market interest is higher than the coupon rate for the debt.