Question

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method

Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, 20Y1, Smiley issued $5,900,000 of 4-year, 12% bonds at a market (effective) interest rate of 11%, receiving cash of $6,086,870. Interest is payable semiannually on April 1 and October 1.

a. Journalize the entry to record the issuance of bonds on April 1, 20Y1. If an amount box does not require an entry, leave it blank.

b. Journalize the entry to record the first interest payment on October 1, 20Y1, and amortization of bond premium for six months, using the straight-line method. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

c. Why was the company able to issue the bonds for $6,086,870 rather than for the face amount of $5,900,000?

The market rate of interest is _________ the contract rate of interest.

Answer 1

• Requirement [a]

Date	Accounts title	Debit	Credit
01-Apr	Cash	$6,086,870
	Premium on Bonds Payable ($6086870 - 5900000)		$186,870
	Bonds Payable		$5,900,000
	(to record issuance)

• [b]

Date	Accounts title	Debit	Credit
01-Oct	Interest Expense	$330,641
	Premium on Bonds Payable ($186870 / 8 payments)	$23,359
	Cash ($5900000 x 12% x 6/12)		$354,000
	(to record first payment)

• [c]

The market rate of interest is LESS THAN the contract rate of interest.
For the excess interest provided, premium is being charged by the investors.