Favreau Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Favreau Corporation issued $12,700,000 of five-year, 11% bonds at a market (effective) interest rate of 9%, receiving cash of $13,704,946. Interest is payable semiannually on April 1 and October 1.

Required:

a. Journalize the entries to record the following. Refer to the chart of accounts for the exact wording of the account titles. CNOW journals do not use lines for journal explanations. Every line on a journal page is used for debit or credit entries. CNOW journals will automatically indent a credit entry when a credit amount is entered.

1. Issuance of bonds on April 1.

2. 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.)

b. Explain why the company was able to issue the bonds for $13,704,946 rather than for the face amount of $12,700,000.

B. Explain why the company was able to issue the bonds for $13,704,946 rather than for the face amount of $12,700,000.

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).

CHART OF ACCOUNTS

Favreau Corporation

General Ledger

ASSETS

110 Cash

111 Petty Cash

121 Accounts Receivable

122 Allowance for Doubtful Accounts

126 Interest Receivable

127 Notes Receivable

131 Merchandise Inventory

141 Office Supplies

142 Store Supplies

151 Prepaid Insurance

191 Land

192 Store Equipment

193 Accumulated Depreciation-Store Equipment

194 Office Equipment

195 Accumulated Depreciation-Office Equipment

LIABILITIES

210 Accounts Payable

221 Salaries Payable

231 Sales Tax Payable

232 Interest Payable

241 Notes Payable

251 Bonds Payable

252 Discount on Bonds Payable

253 Premium on Bonds Payable

EQUITY

311 Common Stock

312 Paid-In Capital in Excess of Par-Common Stock

315 Treasury Stock

321 Preferred Stock

322 Paid-In Capital in Excess of Par-Preferred Stock

331 Paid-In Capital from Sale of Treasury Stock

340 Retained Earnings

351 Cash Dividends

352 Stock Dividends

REVENUE

410 Sales

610 Interest Revenue

611 Gain on Redemption of Bonds

EXPENSES

510 Cost of Merchandise Sold

515 Credit Card Expense

516 Cash Short and Over

521 Sales Salaries Expense

522 Office Salaries Expense

531 Advertising Expense

532 Delivery Expense

533 Repairs Expense

534 Selling Expenses

535 Rent Expense

536 Insurance Expense

537 Office Supplies Expense

538 Store Supplies Expense

541 Bad Debt Expense

561 Depreciation Expense-Store Equipment

562 Depreciation Expense-Office Equipment

590 Miscellaneous Expense

710 Interest Expense

711 Loss on Redemption of Bonds