Lerner Corporation wholesales repair products to equipment manufacturers. On Apr
ID: 2466960 • Letter: L
Question
Lerner Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Lerner Corporation issued $12,000,000 of five-year, 8% bonds at a market (effective) interest rate of 6%, receiving cash of $13,023,576. Interest is payable semiannually on April 1 and October 1.
Required: A. Journalize the entries to record the following. Refer to the Chart of Accounts for exact wording of account titles.
1. Issuance of bonds on April 1, 2016.
2. First interest payment on October 1, 2016, and amortization of bond premium for six months, using the straight-line method. (Round to the nearest dollar.)
B. Explain why the company was able to issue the bonds for $13,023,576 rather than for the face amount of $12,000,000.
Explanation / Answer
Answer No.A
Cash a/c Dr. $13,023,576
To 8% Bond Capital a/c $12,000,000
To Premium on issue of 8%bond a/c $1,023,576
(Issuance of bond)
Interest on 8% bond a/c Dr.$480,000
To 8% bond hodlers a/c $480,000
(Interest for the period april2016 to October 2016 ($12000000*8%)/2)
Profit and Loss a/c Dr.$480,000
To Interest on 8% bond account a/c$480,000
(Being interest expenses transfered to profit and loss account)
Premium on issue of 8% bond a/c$1,02,358
To Amortisation of premium on 8% bond a/c Dr.$102,358
(Being premium of bond amortised for 6 months usning straight line method. (($1023576/5)/2)
Amortisation of premium a/c$1,02,358
To Profit and loss a/c Dr.$102,358
(Amortised premium transfered to profit and loss account)
Answer B.
Shares are issued over the par value or at premium when the companies have good income and reputation in the market and general public are ready to buy the shares above the par value .In the present case the Lerner corporation must have been enjoing good market reputaion and healthy financials.Further in this case the effective interest rate is 6% which is lower than rate on face value of bond which is 8%. The difference lead to premium which will be amortised over the period of the bond to nullify the difference between actual interest paid and effective interest rate.
April 01,2016Cash a/c Dr. $13,023,576
To 8% Bond Capital a/c $12,000,000
To Premium on issue of 8%bond a/c $1,023,576
(Issuance of bond)
October 1,2016Interest on 8% bond a/c Dr.$480,000
To 8% bond hodlers a/c $480,000
(Interest for the period april2016 to October 2016 ($12000000*8%)/2)
Profit and Loss a/c Dr.$480,000
To Interest on 8% bond account a/c$480,000
(Being interest expenses transfered to profit and loss account)
October 1,2016Premium on issue of 8% bond a/c$1,02,358
To Amortisation of premium on 8% bond a/c Dr.$102,358
(Being premium of bond amortised for 6 months usning straight line method. (($1023576/5)/2)
Amortisation of premium a/c$1,02,358
To Profit and loss a/c Dr.$102,358
(Amortised premium transfered to profit and loss account)
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