Question

Daan Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Daan Corporation issued $1,600,000 of 6-year, 7% bonds at a market (effective) interest rate of 4%, receiving cash of $1,853,807. 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 $1,853,807 rather than for the face amount of $1,600,000?

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

Answer 1

Solution a:

Journal Entries - Daan Corporation
Date	Particulars	Debit	Credit
1-Apr-16	Cash Dr	$1,853,807.00
	To Bond Payable		$1,600,000.00
	To Premium on Bond Payable		$253,807.00
	(To record issue of bond at premium)

Solution b:

Journal Entries - Daan Corporation
Date	Particulars	Debit	Credit
1-Oct-16	Interest expense Dr	$34,849.00
	Premium on bond payable Dr ($253,807 / 12)	$21,151.00
	To Cash		$56,000.00
	(To record annual payment and premium amortization)

Solution c:

Company able to issue the bonds for $1,853,807 rather than for the face amount of $1,600,000 because The market rate of interest is lower than the contract rate of interest.