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 $3,300,000 of 7-year, 6% bonds at a market (effective) interest rate of 5%, receiving cash of $3,492,900. 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 $3,492,900 rather than for the face amount of $3,300,000?

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

Answer 1

a.

Date	Account Titles	Debit	Credit
Apr-01	Cash	$ 3,492,900
2016	Bonds Payable		$   3,300,000
	Premium on Bonds Payable		$      192,900

b.

Date	Account Titles	Debit	Credit
Oct-01	Interest Expense	$      85,221
2016	Premium on Bonds Payable	$      13,779
	Cash		$         99,000

c. The market rate of interest is lower than the contract rate of interest.