Question

TIME VALUE... MyLab & Mast.. Step 1: Cost o... Cengage Apply for Cre... CengageN... CNOWV2 Stud... eBook Show Me How Calculator 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 $4,500,000 of 7-year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $4,715,767. 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 $4,715,767 rather than for the face amount of $4,500,000? the contract rate of interest. The market rate of interest is Previous Next > Check My Work

Answer 1

premium on bonds = Issue price - Face value

= 4715767-4500000

= 215767

amortization for each year = premium /( no of years for maturity)

= 215767/7

= 30823.85

= 30824

Semi Annual period =  30824/2 = 15412

interest for semi annual period = 4500000*12%*(6/12)

= 270000

INTEREST EXPENSE TO BE RECORDED on october 1 = 270000-15412 = 254588

journal entries

date	particulars	debit	credit
Apr-01	cash A/c	4715767
	to premium on bonds payable A/C		284233
	TO bonds payable A/c		4500000
Oct-01	interest expense A/c dr	254588
	premium on bonds payable A/c	15412
	to Cash A/c		270000

C) since market interest rate is lower than the contract rate of interest