Final answer:
a) Journal entry to record the sale of the bonds on January 1, 2014: Debit Cash, Credit Bonds Payable and Premium on Bonds Payable. b) Balance sheet presentation on December 31, 2017: Bonds Payable and Premium on Bonds Payable. c) Bonds sold at a price above face amount due to lower market interest rates compared to the bond's coupon rate.
Step-by-step explanation:
a) Journal entry to record the sale of the bonds on January 1, 2014:
- Debit: Cash (103% of $600,000) = $618,000
- Credit: Bonds Payable (Face value of $600,000)
- Credit: Premium on Bonds Payable (Difference between cash received and face value) = $18,000
b) Balance sheet presentation on December 31, 2017:
- Bonds Payable = Face value - Premium on Bonds Payable = $600,000 - $10,800 = $589,200
- Premium on Bonds Payable = $10,800
c) Bonds sold at a price above face amount:
When bonds are sold at a price above the face amount, it means that the effective interest rate is lower than the stated interest rate. This occurs when market interest rates are lower than the bond's coupon rate. Investors are willing to pay more for these bonds because they offer higher interest payments compared to other investments in the market.