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Favreau Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Favreau Corporation issued $4,700,000 of 7- year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $4,925,357. Interest is payable semiannually on April 1 and October 1. 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. 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. c. Why was the company able to issue the bonds for $4,925,357 rather than for the face amount of $4,700,000? The market rate of interest is the contract rate of interest.

Favreau Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Favreau Corporation issued $4,700,000 of 7- year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $4,925,357. Interest is payable semiannually on April 1 and October 1. 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. 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. c. Why was the company able to issue the bonds for $4,925,357 rather than for the face amount of $4,700,000? The market rate of interest is the contract rate of interest.

Excel Applications for Accounting Principles
Excel Applications for Accounting Principles
4th Edition
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Gaylord N. Smith
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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 $4,700,000 of 7- year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $4,925,357. Interest is payable semiannually on April 1 and October 1. 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. 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. c. Why was the company able to issue the bonds for $4,925,357 rather than for the face amount of $4,700,000? The market rate of interest is the contract rate of interest.
Transcribed Image Text: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 $4,700,000 of 7- year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $4,925,357. Interest is payable semiannually on April 1 and October 1. 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. 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. c. Why was the company able to issue the bonds for $4,925,357 rather than for the face amount of $4,700,000? The market rate of interest is the contract rate of interest.
Expert Solution
Step 1: Facts identifier

Market / Effective rate : 11% p.a. or 5.5% semi-annually

Term of bond = 7 Years

Semi-annual interest payment makes 14 (7 x 2) effective period count

PV factor for $1 at 5.5%, 14 years : 0.4726

PV factor for annuity of $1 at 5.5%, 14 years : 9.5896

Bonds price is calculated as below: 

Accounting homework question answer, step 1, image 1

Please note that $130 ($4,925,487 - $4,925,357) arises out of rounding off. 

Bond premium amortization schedule is as follows: 

Accounting homework question answer, step 1, image 2 

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