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 $2,400,000 of 6-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $2,631,920. 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 $2,631,920 rather than for the face amount of $2,400,000?

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

Answer 1

a)

Journal

Date	Account title	Debit	Credit
April 1, 2016	Cash	$2,631,920
	Bonds payable		$2,400,000
	Premium on bonds payable		$231,920
	(To record issue of bonds at premium)

Par value of bonds = $2,400,000

Cash receipts from issue of bonds = $2,631,920.

Premium on bonds payable = Par value of bonds - Cash receipts from issue of bonds

= $2,631,920 - $2,400,000

= $231,920

b)

Journal

October 1, 2016	Interest expense	88,673
	Premium on bonds payable	19,327
	Cash		$108,000
	(To record semi annual interest expense)

Semi annual interest payment on October 1, 2016 = Par value of bonds x Interest rate x 6/12

= 2,400,000 x 9% x 6/12

= $108,000

Semi annual amortization of bond premium = 231,920/12

= $19,327

c)

The market rate of interest is less the contract rate of interest.