Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Year 1, Shunda Corporation issued $22,000,000 of five-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $23,829,684. Interest is payable semiannually. Shunda Corporations fiscal year begins on January 1. The company uses the interest method.

Required:

A.

Journalize the entries to record the following transactions. Refer to the Chart of Accounts for exact wording of account titles.

1.	Sale of the bonds.
2.	First semiannual interest payment, including amortization of premium. Round to the nearest dollar.
3.	Second semiannual interest payment, including amortization of premium. Round to the nearest dollar.

B.

Determine the bond interest expense for the first year.

C.

Explain why the company was able to issue the bonds for $23,829,684 rather than for the face amount of $22,000,000.

Journal

A. Journalize the entries to record the transactions. Refer to the Chart of Accounts for exact wording of account titles.

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JOURNAL

ACCOUNTING EQUATION

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT	ASSETS	LIABILITIES	EQUITY
1
2
3
4
5
6
7
8
9

Additional Question

B. Determine the bond interest expense for the first year.

Annual interest paid	?
Less premium amortized	?
Interest expense for first year	?

Final Question

C. Explain why the company was able to issue the bonds for $23,829,684 rather than for the face amount of $22,000,000.

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).