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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Amortize premium by interest method

Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Year 1, Shunda Corporation issued $22,000,000 of five-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $23,829,684. Interest is payable semiannually. Shunda Corporation’s fiscal year begins on January 1. The company uses the interest method.

a. Journalize the entries to record the following:

  1. 1. Sale of the bonds.
  2. 2. First semiannual interest payment, including amortization of premium. Round to the nearest dollar.
  3. 3. Second semiannual interest payment, including amortization of premium. Round to the nearest dollar.

b. Determine the bond interest expense for the first year.

c. Explain why the company was able to issue the bonds for $23,829,684 rather than for the face amount of $22,000,000.

a (1)

To determine

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Premium on bonds payable: It occurs when the bonds are issued at a high price than the face value.

Effective-interest amortization method: Effective-interest amortization methodit is an amortization model that apportions the amount of bond discount or premium based on the market interest rate.

In this method, first, interest expense is calculated based on the current carrying amount and market interest rate and cash interest payment is calculated based on the face value amount and stated interest rate and then, the different between the cash interest payment and interest expense is amortized as a decrease to the discount or premium.

To Journalize:  Sale of the bonds.

Explanation

Journalize sale of bonds.

Date Account Title and Explanation Post Ref.

Debit

($)

Credit

($)

  Cash   23,829,684  
          Premium on Bonds Payable (1)     1,829,684
       Bonds Payable     22,000,000
    (To record the issue of bonds at premium)      

Table (1)

Working note:

Calculate discount on bonds payable...

b.

To determine
The amount of bond interest expense for first year.

c.

To determine

To explain: The reason why the company was able to issue the bonds for $23,829,684 rather than $22,000,000.

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