Amortize premium by interest method
Knight Corporation wholesales auto parts to auto manufacturers. On March 1, 2012, Knight Corporation issued $17,500,000 of five-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $18,851,252. Interest is payable semiannually. Knight Corporation's fiscal year begins on March 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 $18,851,252 rather than for the face amount of $17,500,000.