Question

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method Smiley Corporation wholesales repair products to...

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.

Homework Answers

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%)

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