FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method

Favreau Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Favreau Corporation issued $35,000,000 of five-year, 7% bonds at a market (effective) interest rate of 6%, receiving cash of $36,492,785. Interest is payable semiannually on April 1 and October 1.

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a.  Journalize the entry to record the issuance of bonds on April 1. If an amount box does not require an entry, leave it blank.

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b.  Journalize the entry to record the first interest payment on October 1 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. If an amount box does not require an entry, leave it blank.

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c.  Why was the company able to issue the bonds for $36,492,785 rather than for the face amount of $35,000,000?

The market rate of interest is 

 

 the contract rate of interest 

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