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

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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Chapter
Section
BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 24E
Textbook Problem
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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.

  1.     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.
  2.     b.          Determine the bond interest expense for the first year.
  3.     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

Journalize the sale of the bonds.

Explanation of Solution

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 method it 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.

Journalize sale of bonds.

DateAccount Title and ExplanationPost Ref.

Debit

($)

Credit

($)

 Cash  23,829,684 
        Premium on Bonds P...

b.

To determine

Calculate the amount of bond interest expense for first year.

c.

To determine

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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Chapter 14 Solutions

Financial Accounting
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