Question

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley issued $6,200,000 of 9-year, 9% bonds at a market (effective) interest rate of 6%, receiving cash of $7,479,078. Interest is payable semiannually on April 1 and October 1.
a. Journalize the entry to record the issuance of bonds on April 1, Year 1. 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, Year 1, and amortization of bond premium for six months, using the straight-line method. (Round to the nearest dollar.) For a compound transaction, if an amount box does not require an entry, leave it blank.

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

Answer 1

Answer:

All requirements are solved below

Explanation:

Requirement A: Entry to record the issuance of a bond on April 1 year 1

                                                     DEBIT           CREDIT

Entry

Cash                                       $7,479,078  

Bonds payable                                              $6,200,000  

Premium on Bonds payable                          $1,279,078

Requirement B: Entry to record the first interest payment on October 1 Year 1

                                                        DEBIT           CREDIT

Entry

interest expense                          $207940  

Premium on Bonds payable(w)    $71,060  

Cash(w)                                                                $279,000

Working

Cash = $6,200,000 x 9% x 6/12

Cash = 279000

Premium = ($1,279,078/9years ) x 6/12

Premium = $71,060

Requirement C: Why was the company able to issue the bonds for $7,479,078 rather than for the face amount of $6,200,000  

Answer: The company was able to issue the bonds for $7,479,078 rather than $6,200,000  because the market rate of interest is less than the contract rate of interest.