Question

14-07 14-3Entries 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 $1,400,000 of 8-year, 7% bonds at a market (effective) interest rate of 6%, receiving cash of $1,487,929. 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 issue the bonds for $1,487,929 rather than for the face amount of $1,400,000?

The market rate of interest is (GREATER THAN/LESS THAN) the contract rate of interest

Answer 1

a. journal entry for issue of bond

date	particulars	debit $	credit $
01.04.2016	cash account dr	1,487,929
	to bond payable		1,400,000
	to premium on bond payable		87,929

Being issue of bonds of face value 1,400,000 $ at a premium of 87,929 $.

B. journal entry of the first semi annual interest payment combined with the amortisation of premium

date	particulars	debit $	credit $
01.11.2016	interest expense	43,504
	premium of bonds payable	5,496
	to cash		49,000

Being the first semi annual interest payment wheren the the propotion amortisation of premium is adjusted

calculation of semi annual interest payment

1,400,000 $ * 7% * 6/12 = 49000 $

calulation of semi annual amortisation of premium

premium value / term of the bond * 6/12

87,929 / 8 * 6/12

= 5,496 $

C.

As the market rate of interest is less than the coupon rate of the bond , it is anticipate that more income will be offered by the bond therefore it can be sold above its face value .