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 $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.
a. Journalize the entry to record the issuance of bonds on April 1, Year 1. For a compound transaction, 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 and Explanation:

The Journal entry is shown below:-

a. Cash Dr, $20,811,010

            To Bonds payable $20,000,000

            To Premium on Bonds payable $811,010

(Being issuance of the bond is recorded)

For recording this we debited the cash as it increased the assets and at the same time it also increased the liabilities so the bond payable and premium is credited

b. Interest expenses Dr, $818,899

Premium on Bonds payable $81,101 ($811,010 ÷ 5 × 6 ÷ 12  )

              To Cash $900,000 ($20,000,000 × 9% × 6 ÷ 12)

(Being  interest expense is recorded)

For recording this we debited the interest expense as it increased the expenses and credited the cash as it reduced the assets plus the remaining balance is debited to premium on bond payable

c.The contract rate of interest is higher than market rate of interest.