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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 $3,800,000 of 5-year, 6% bonds at a market (effective) interest rate of 5%, receiving cash of $3,966,289. 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.
| fill in the blank aebe58fdff87faf_2 | fill in the blank aebe58fdff87faf_3 | ||
| fill in the blank aebe58fdff87faf_5 | fill in the blank aebe58fdff87faf_6 | ||
| fill in the blank aebe58fdff87faf_8 | fill in the blank aebe58fdff87faf_9 |
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.
| fill in the blank f33713f5304afba_2 | fill in the blank f33713f5304afba_3 | ||
| fill in the blank f33713f5304afba_5 | fill in the blank f33713f5304afba_6 | ||
| fill in the blank f33713f5304afba_8 | fill in the blank f33713f5304afba_9 |
c. Why was the company able to issue the bonds
for $3,966,289 rather than for the face amount of $3,800,000?
The market rate of interest is the contract rate
of interest.
Solutions
Expert Solution
| Premium on Bond issued =$3,966,289 - $3,800,000 =$166,289 | |||
| Premium on Bonds payable amortized each period =$166,289 / 10 =$16,629 | |||
| Interest paid in cash =$3,800,000*6%*6/12 =$114,000 | |||
| Interest expense as per straight line method =$114,000 - $16,629 =$97,371 | |||
| So the entry will be: | |||
| Date | Accounts & Explanations | Debit | Credit |
| Apr 1,20Y1 | Cash | $ 3,966,289 | |
| Bond payable | $ 3,800,000 | ||
| Premium on Bond payable | $ 166,289 | ||
| (to record issue of Bond at premium) | |||
| Oct 1,20Y1 | Interest expenses | $ 97,371 | |
| Premium on Bond payable | $ 16,629 | ||
| Cash | $ 114,000 | ||
| (to record amortization for 1st 6 month period of Bond) | |||
| Since the market interest rate is LESS than the contract interest rate, Hence the company is able to issue bond at premium. | |||
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