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 $6,700,000 of 6-year, 10% bonds at a market (effective) interest rate of 7%, receiving cash of $7,671,165. 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 Bonds Payable 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 issue the bonds for $7,671,165 rather than for the face amount of $6,700,000? The market rate of interest is greater than the contract rate of interest.

Answer 1

Solution:

a. April 1, 2016

Cash ...................................................$7,671,165.

Premium on bonds payable ........................................971,165

Bonds payable ...........................................................$6,700,000

b. October 1, 2016

Interest expense ...................................254,070

Premium on bonds payable ..................80,930

Cash ..........................................................335,000

Premium on bonds payable = 971,165/12 = $80930

Cash = 6,700,000 x 10% x 6/12 = 335,000

c. The bonds sell for the greater than the face amount because the market rate of interest is less than the contract rate of interest.