Accounting 26th Edition by Carl Warren,James Reeve,Jonathan Duchac

Exercise 44

Amortize premium by interest method
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 Corporation'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.