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 $7,100,000 of 4-year, 8% bonds at a market (effective) interest rate of 7%, receiving cash of $7,344,025. 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 $7,344,025 rather than for the face amount of $7,100,000? The market rate of interest is the contract rate of interest.

Answer 1

a)

Journal

April 1, 2016	Cash	7,344,025
	Bonds payable		7,100,000
	Premium on bonds payable		244,025
	(To record bond issue at premium)

Par value of bonds = $7,100,000

Issue price of bonds = $7,344,025

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

= $7,344,025 - $7,100,000

= $244,025

b)

Journal

October 1, 2016	Interest expense	253,497
	Premium on bonds payable	30,503
	Cash		284,000
	(To record semi annual interest expense)

Semi annual interest payment = 7,100,000 x 8% x 6/12

= $284,000

Semi annual amortization of bond premium = 244,025/8

= $30,503

c)

The market rate of interest is lower than contract rate of interest

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