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 $4,500,000 of 10-year, 6% bonds at a market (effective) interest rate of 5%, receiving cash of $4,850,755. Interest is payable semiannually on April 1 and October 1.

a. Journalize the entry to record the issuance of bonds on April 1.

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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 $4,850,755 rather than for the face amount of $4,500,000?

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