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 $4,600,000 of 4-year, 10% bonds at a market (effective) interest rate of 7%, receiving cash of $5,074,303. 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. Cash Premium on Bonds Payable 4,600,000 Bonds Payable 5,074,303 474,303 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. Interest Expense Premium on Bonds Payable Cash c. Why was the company able to issue the bonds for $5,074,303 rather than for the face amount of $4,600,000? The market rate of interest is less than the contract rate of interest.

Answer 1

Journal entries

No	General Journal	Debit	Credit
a	Cash	5074303
	Premium on bonds payable		474303
	Bonds payable		4600000
b	Interest expense (5074303*7%*6/12)	177601
	Premium on bonds payable	52399
	Cash (4600000*10%*6/12)		230000

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