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 $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.

Answer 1

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.