Amortize Premium by Interest Method

Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Shunda issued $30,000,000 of five-year, 10% bonds at a market (effective) interest rate of 8%, receiving cash of $32,433,150. Interest is payable semiannually. Shundas 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. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

		fill in the blank b46af1ff5f9d04a_2	fill in the blank b46af1ff5f9d04a_3
		fill in the blank b46af1ff5f9d04a_5	fill in the blank b46af1ff5f9d04a_6
		fill in the blank b46af1ff5f9d04a_8	fill in the blank b46af1ff5f9d04a_9

2. First semiannual interest payment, including amortization of premium. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

		fill in the blank 39d74202bfedfe0_2	fill in the blank 39d74202bfedfe0_3
		fill in the blank 39d74202bfedfe0_5	fill in the blank 39d74202bfedfe0_6
		fill in the blank 39d74202bfedfe0_8	fill in the blank 39d74202bfedfe0_9

3. Second semiannual interest payment, including amortization of premium. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

		fill in the blank 370c39fac018fde_2	fill in the blank 370c39fac018fde_3
		fill in the blank 370c39fac018fde_5	fill in the blank 370c39fac018fde_6
		fill in the blank 370c39fac018fde_8	fill in the blank 370c39fac018fde_9

b. Determine the bond interest expense for the first year. Round to the nearest dollar.

Annual interest paid	$fill in the blank d5240c031fc1fbf_1
Less premium amortized	fill in the blank d5240c031fc1fbf_2
Interest expense for first year	$fill in the blank d5240c031fc1fbf_3

c. Explain why the company was able to issue the bonds for $32,433,150 rather than for the face amount of $30,000,000.

The bonds sell for more than their face amount because the market rate of interest is the contract rate of interest. Investors willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate).