Question

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method Daan Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Daan Corporation issued $7,300,000 of 10-year, 11% bonds at a market (effective) interest rate of 9%, receiving cash of $8,249,579. Interest is payable semiannually on April 1 and October 1. a. Journalize the entry to record the issuance of bonds on April 1, 2016. For a compound transaction, if an amount box does not require an entry, leave it blank. Cash 8,249,579 Premium on Bands Payable 949,579 Bonds Payable 7,300,000 Feedback Check My Work Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account. The straight-line method of amortization provides equal amounts of amortization over the life of the bond. b. Journalize the entry to record the first interest payment on October 1, 2016, and amortization of bond premium for six months, using the straight-line method. The bond premium amortization is combined with the semiannual interest payment. (Round to the nearest dollar.) For a compound transaction, if an amount box does not require an entry, leave it blank. Interest Expense 306,543 X Premium on Bonds Payable 94,957 X Cash 401,500

Answer 1

Face Value of Bonds = $7,300,000
Issue Value of Bonds = $8,249,579

Premium on Bonds Payable = Issue Value of Bonds - Face Value of Bonds
Premium on Bonds Payable = $8,249,579 - $7,300,000
Premium on Bonds Payable = $949,579

Annual Coupon Rate = 11.00%
Semiannual Coupon Rate = 5.50%
Semiannual Coupon = 5.50% * $7,300,000
Semiannual Coupon = $401,500

Time to Maturity = 10 years
Semiannual Period = 20

Semiannual Amortization of Premium = Premium on Bonds Payable / Semiannual Period
Semiannual Amortization of Premium = $949,579 / 20
Semiannual Amortization of Premium = $47,479

Semiannual Interest Expense = Semiannual Coupon - Semiannual Amortization of Premium
Semiannual Interest Expense = $401,500 - $47,479
Semiannual Interest Expense = $354,021

Credit Date Apr. 01, 2016 Debit 8,249,579 General Journal Cash Bonds Payable Premium on Bonds Payable Interest Expense Premium on Bonds Payable Cash 7,300,00 949,579 Oct. 01, 2016 354,021 47,479 401,500