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 $7,600,000 of 10-year, 7% bonds at a market (effective) interest rate of 6%, receiving cash of $8,165,344. Interest is payable semiannually on April 1 and October 1.

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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.

blank	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds PayableCash	Cash	Cash
	Accounts PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds PayablePremium on Bonds Payable	Premium on Bonds Payable	Premium on Bonds Payable
	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest ExpenseBonds Payable	Bonds Payable	Bonds Payable

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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.

blank	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest ReceivableInterest Expense	Interest Expense	Interest Expense
	Bonds PayableCashDiscount on Bonds PayableInterest ReceivablePremium on Bonds PayablePremium on Bonds Payable	Premium on Bonds Payable	Premium on Bonds Payable
	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds PayableCash	Cash	Cash

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c. Why was the company able to issue the bonds for $8,165,344 rather than for the face amount of $7,600,000?

The market rate of interest is

greater than less thanless than

the contract rate of interest.