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 =$3,800,0006%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.

ekkarill92 answered 1 year ago

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