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 $5,500,000 of 8-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $6,165,175. Interest is payable semiannually on April 1 and October 1.

Question Content Area

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.

blank	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -
	Accounts PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -
	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest Expense	- Select -	- Select -

Question Content Area

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.

blank	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest Receivable	- Select -	- Select -
	Bonds PayableCashDiscount on Bonds PayableInterest ReceivablePremium on Bonds Payable	- Select -	- Select -
	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -

Question Content Area

c. Why was the company able to issue the bonds for $6,165,175 rather than for the face amount of $5,500,000?

The market rate of interest is

greater than less than

the contract rate of interest.