In: Accounting
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.
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. | ||