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 4-year, 10 % bonds at a market (effective) interest rate of 9%, receiving cash of $7,540,749. 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 bex dses not require an entry, leave it biank Cash Interest Expense x Bonds Payable Ftbe b. ournalize the entry to record the first interest payment on October 1, 2016, and amortization of bend premium for six months, using the straight-line method. The bond premium amortization is cembined 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 Feehec c. Why was the company able to issue the bonds for $7,540,749 rather than for the face amount of $7,300,0007 the contract rate of interest The market rate of interest is

Answer 1

a.

General Journal	Debit	Credit
Cash	7,540,749
Bonds payable		7,300,000
Premium on bonds payable		240,749

Par value of bonds = $7,300,000

Issue price of bonds = $7,540,749

Premium on bonds payable = Issue price of bonds - Par value of bonds

= 7,540,749-7,300,000

= $240,749

b.

General Journal	Debit	Credit
Interest expense	334,906
Premium on bonds payable	30,094
Cash		365,000

Semi annual bond premium amortization = 240,749/8

= $30,094

Semi annual interest payment = 7,300,000 x 10% x 6/12

= $365,000

c.

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

Kindly comment if you need further assistance.

Thanks‼!