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

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 $8,800,000 of 9-year, 10% bonds at a market (effective) interest rate of 8%, receiving cash of $9,914,018. 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. 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. c. Why was the company able to issue the bonds for $9,914,018 rather than for the face amount of $8,800,000? The market rate of interest is the contract rate of interest.

Explanation / Answer

Journal entry :

c) The market rate of interest is less than the contract rate of interest.

No Accounts & explanation debit credit a) Cash 9914018 Bonds payable 8800000 Premium on bonds payable 1114018 b) Interest expense 378110 Premium on bonds payable (1114018/18) 61890 Cash (8800000*10%*6/12) 440000

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