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 $6,500,000 of 10-year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $6,888,387. 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. Cash Cash 6,888,387 Cash 0 Premium on Bonds Payable Premium on Bonds Payable 0 Premium on Bonds Payable 388,387 Bonds Payable Bonds Payable 0 Bonds Payable 6,500,000 Feedback 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. Interest Expense Interest Expense Interest Expense 0 Premium on Bonds Payable Premium on Bonds Payable 19,419 Premium on Bonds Payable 0 Cash Cash 0 Cash Feedback Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account. The straight-line method of amortization provides equal amounts of amortization over the life of the bond. c. Why was the company able to issue the bonds for $6,888,387 rather than for the face amount of $6,500,000? The market rate of interest is less than the contract rate of interest.