On January 1, the first day of its fiscal year, Chin Company issued $10,000,000
ID: 2552894 • Letter: O
Question
On January 1, 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.
Required:
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.
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.
The bonds sell for less than their face amount because the market rate of interest is______ the contract rate of interest. Investors ______willing to pay the full face amount for bonds that pay a lower contract rate of interest than the rate they could earn on similar bonds (market rate).
Explanation / Answer
A. Journal
* Interest alwayes paid on face value of bond
* Discount on bonds will be write-off in 5 years
B. Interest Expense for first year
390558.5+390558.5= 781117
C. Company issue bonds on discount because of interest rate in market is higher than bonds interest rate.
Date Particular Debit Credit 1, Jan Cash 9594415 Discount on bonds 405585 Bonds payable 10000000 30, June Interest Expenses 390558.5 Discount on bonds 40558.5 Cash 350000 30,Dec Interest Expenses 390558.5 Discount on bonds 40558.5 Cash 350000