Lerner Corporation wholesales repair products to equipment manufacturers. On Apr

Question

Lerner Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Lerner Corporation issued $24,200,000 of five-year, 11% bonds at a market (effective) interest rate of 9%, receiving cash of $26,114,936. 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 $26,114,936 rather than for the face amount of $24,200,000.

Explanation / Answer

Journal entry :

b) Market rate of interest is lower than company's interest rate so lerner corporation is able to issue the bonds at premium.

Date accounts & explanation debit credit Apr 1 Cash 26114936 Bonds payable 24200000 premium on bonds payable 1914936 (To record issue bonds payable) Oct 1 Interest expense 1139506 premium on bonds payable (1914936/10) 191494 Cash (24200000*11%*6/12) 1331000 (To record interest)

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