Question

Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, 20Y1, Smiley issued $1,900,000 of 8-year, 8% bonds at a market (effective) interest rate of 7%, receiving cash of $2,014,896. 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 $2,014,896 rather than for the face amount of $1,900,000? The market rate of interest is The market rate of interest is the contract rate of interest. the co

Answer 1

Amortization of bond premium on straight line method (per six months) $ 28,724.00 = (2014896-1900000)/8*2 CR DR $ 20,14,896.00 Date Particulars 01-Apr Cash Bonds payable Premium on bonds payable To record 8% bond issued at premium $ $ 19,00,000.00 1,14,896.00 01-Oct Interest expense $ 47,276.00 Premium on bonds payable $ 28,724.00 Cash To record interest paid and interest expense booked while adjusting premium $ 76,000.00 =(1900000*8%)/12*6 The company was able to issue the bonds for 2014896 instead of par value of 19m because the bonds are paying higher annual interest rate of 8% to the Market interest rate of 7%.