Favreau Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Favreau Corporation issued $4,700,000 of 7- year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $4,925,357. 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. 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. c. Why was the company able to issue the bonds for $4,925,357 rather than for the face amount of $4,700,000? The market rate of interest is the contract rate of interest.
Favreau Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Favreau Corporation issued $4,700,000 of 7- year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $4,925,357. 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. 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. c. Why was the company able to issue the bonds for $4,925,357 rather than for the face amount of $4,700,000? The market rate of interest is the contract rate of interest.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
Transcribed Image Text: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 $4,700,000 of 7-
year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $4,925,357. 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.
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.
c. Why was the company able to issue the bonds for $4,925,357 rather than for the face amount of $4,700,000?
The market rate of interest is
the contract rate of interest.
Expert Solution
Step 1: Facts identifier
Market / Effective rate : 11% p.a. or 5.5% semi-annually
Term of bond = 7 Years
Semi-annual interest payment makes 14 (7 x 2) effective period count
PV factor for $1 at 5.5%, 14 years : 0.4726
PV factor for annuity of $1 at 5.5%, 14 years : 9.5896
Bonds price is calculated as below:
Please note that $130 ($4,925,487 - $4,925,357) arises out of rounding off.
Bond premium amortization schedule is as follows:
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