Chapter 11, Problem 11.15EX

Amortize premium by interest method

Shunda Corporation wholesales parts to appliance manufacturers. On January 1, Shunda 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’s fiscal year begins on January 1. The company uses the interest method.

A. Journalize the entries to record the following:

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.