Question

Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley Corporation issued $20,000,000 of five-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of $20,811,010. 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.
2.	First interest payment on October 1 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.)

B.

Explain why the company was able to issue the bonds for $20,811,010 rather than for the face amount of $20,000,000.

Answer 1

A. Amortisation of Bond premium on straight line method = $20,811,010 - $20,000,000 = $811010 / 5*2 = $81101 per six months.

Journal Entries :

DAte	Accounts Titles	Debit $	Credit $
April 1, yr1	Cash	20,811,010
	Bonds Payable		20,000,000
	Premium on Bonds Payable		811,010
	(being 9% Bonds issued at premium)
Oct 1, Yr1	Interest expense	818899
	Premium on Bonds Payable	81101
	Cash		900000
	(being interest paid and interest expene booked while adjusting premium)

B. the company was able to issue the bonds for $20811010 instead of par value of $20m because the bonds are paying higher annual interest rate of 9% to the Market interest rate of 8%.

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