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 $5,400,000 of 5-year, 7% bonds at a market (effective) interest rate of 6%, receiving cash of $5,630,316. 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.

	Cash
	Premium on Bonds Payable
	Bonds Payable

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.

	Interest Expense
	Premium on Bonds Payable
	Cash

c. Why was the company able to issue the bonds for $5,630,316 rather than for the face amount of $5,400,000?

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

Answer 1

a and b. Journal entries

Date	Accounts	Debit	Credit
Apr-01	Cash	5630316
	Premium on Bonds Payable		230316
	Bonds Payable		5400000
Oct-01	Interest Expense	165968
	Premium on Bonds Payable (230316 / 10)	23032
	Cash (5400000 * 7% * 6/12)		189000

c. The company able to issue the bonds for $5,630,316 rather than for the face amount of $5,400,000 because:

The market rate of interest (6%) is lesser than the contract rate of interest (7%)