Corporate Financial Accounting 14th Edition by Carl Warren,James Reeve,Jonathan Duchac

Exercise 48

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 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 is combined with the semiannual interest payment. (Round to the nearest dollar.)
3. Second semiannual interest payment. The bond discount is combined with the semiannual interest payment. (Round 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.