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In: Accounting

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 $7,400,000 of 5-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $8,015,428. 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 $8,015,428 rather than for the face amount of $7,400,000?

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

Solutions

Expert Solution

a)
Date Accounts Title and Explanation Debit Credit
April 1 20y1 Cash          8,015,428
    Premium on bonds payable          615,428
    Bonds Payable      7,400,000
(To record issuance of bond)
b)
Oct 1 20y1 Interest Expense              262,457
Premium on bonds payable                61,543
     Cash          324,000
(To record interest expense )
Note 1: Calculation of Premium on bond
Issue Amount          8,015,428
Less: Face Value          7,400,000
Premium              615,428
No. of year                           5
No. of semiannual                        10
Amortization per semiannual                61,543
c) Because company is paying interest rate more than market rate. Hence demand of company's bonds are higher and investor are ready to pay more.

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