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).