On the first day of its fiscal year, Chin Company issued $14,600,000 of five-year, 10% bonds to finance its operations of producing and selling home improvement products. Interest is payable semiannually. The bonds were issuedat a market (effective) interest rate of 12%, resulting in Chin receiving cash of $13,525,360.a. Journalize the entries to record the following:1. Issuance of the bonds.2. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)3. Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)If an amount box does not require an entry, leave it blank.1.2.3.b. Determine the amount of the bond interest expense for the first year.$c. Why was the company able to issue the bonds for only $13,525,360 rather than for the face amount of $14,600,000?The market rate of interest isthe contract rate of interest. Therefore, inventorswilling to pay the full face amount of the bonds.

Answered: On the first day of its fiscal year,…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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On the first day of its fiscal year, Chin Company issued $14,600,000 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 receiving cash of $13,525,360.
a. Journalize the entries to record the following:
1. Issuance of the bonds.
2. First semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
3. Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round your answer to the nearest dollar.)
If an amount box does not require an entry, leave it blank.
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 $13,525,360 rather than for the face amount of $14,600,000?
The market rate of interest is
the contract rate of interest. Therefore, inventors
willing to pay the full face amount of the bonds.

Expert Solution

Step 1: Understanding of bond issue at discount

A bond issue at a discount means that investors buy bonds for less than their face value, resulting in a higher yield to maturity. The difference between the issue price and the face value represents the discount, and the bond's coupon rate is typically lower than market interest rates. It's a common financial strategy used by issuers to attract investors when interest rates in the market are higher than the bond's coupon rate.

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