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 $6,300,000 of 4-year, 9% bonds at a market (effective) interest rate of 6%, receiving cash of $6,963,362. 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 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. c. Why was the company able to issue the bonds for $6,963,362 rather than for the face amount of $6,300,000? The market rate of interest is the contract rate of interest.

Answer 1

Requirement a

Account Title and Explanation	Debit	Credit
Cash	$ 6,963,362
Premium on bonds payable		$ 663,362
Bonds payable		$ 6,300,000

Requirement b

Account Title and Explanation	Debit	Credit
Bond interest expense	$ 200,580
Premium on bonds payable	$ 82,920
Cash		$ 283,500

Requirement c

The market rate of interest is Less than the contract rate of interest .

.

Working

Bond issue price	$ 6,963,362
Face value	$ 6,300,000
Premium on bonds payable	$ 663,362
Number of Interest payments (8 years x 2)	8
Discount/ premium to be amortized per Half year	$ 82,920
Cash Interest on bond (6300000 x 4.5%)	$ 283,500
Interest expense to be recorded (283500-82920)	$ 200,580