Question

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method

Daan Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Daan Corporation issued $7,900,000 of 7-year, 10% bonds at a market (effective) interest rate of 7%, receiving cash of $9,194,083. Interest is payable semiannually on April 1 and October 1.

a. Journalize the entry to record the issuance of bonds on April 1, 2016. For a compound transaction, if an amount box does not require an entry, leave it blank.

Cash
Premium on Bonds Payable
Bonds Payable

b. Journalize the entry to record the first interest payment on October 1, 2016, 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.) For a compound transaction, if an amount box does not require an entry, leave it blank.

Interest Expense
Premium on Bonds Payable

Cash

Answer 1

Step-by-step explanation:

1. Please see journal entry below

a. Cash Dr, $9,194.083

To bonds payable $7,900,000

To premium on bonds payable $1,294,083

(Being issuance of bonds that is recorded)

The above transactions were recorded because cash was debited as it increase the assets, while also increasing the liabilities hence bond payable and premium is credited.

b. Interest expenses Dr, $302,565

Premium on bonds payable $92,435 ($1,294,083 ÷ 7 × 6 ÷ 12)

To cash $395,000

($7,900,00 × 10% × 6 ÷ 12)

(Being interest expenses that is recorded)

For recording the above transaction, interest expense was debited as it increase expenses while cash was credited as it reduced the assets including the balance which is debited to premium on bonds payable.