Question

Entries for Issuing Bonds and Amortizing Premium by Straight-Line Method

Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley issued $7,200,000 of 5-year, 10% bonds at a market (effective) interest rate of 9%, receiving cash of $7,484,858. Interest is payable semiannually on April 1 and October 1.

a. Journalize the entry to record the issuance of bonds on April 1, Year 1. If an amount box does not require an entry, leave it blank.

	Cash
	Premium on Bonds Payable
	Bonds Payable

Feedback

Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.

The straight-line method of amortization provides equal amounts of amortization over the life of the bond.

Learning Objective 2.

b. Journalize the entry to record the first interest payment on October 1, Year 1, 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.

	Interest Expense
	Premium on Bonds Payable
	Cash

Answer 1

Issue price of bonds			74,84,858
Less: Par value of bonds		72,00,000
Total Premium			2,84,858
Divide: Number of periods (5*2)		10
Premium amortized each period		28486
Semi annual cash interest paid = 7200,000*10%*6/12=	360000
Journal entries
S.no.	Accounts title and explanations		Debit $	Credit $
01.04.Yr01	Cash account			74,84,858
	Bonds payable				72,00,000
	Premium on bonds payable			2,84,858
	(for issuance of bonds)
31.10.Yr01	Interest expense			3,31,514
	Premium on bonds payable		28,486
	Cash account				3,60,000
	(for interest xpense incurred)