Question

Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smileysued $18.400,000 of five year, 12% bonds at a market offective interest rate of 10%, receiving cash of $19,820,734. Interest is payable semiannually on April 1 and October 1 Required: a. Joumalize the entries to record the following. Refer to the Chart of Accounts for exact wording of accounts 1. Issuance of bonds on April 1, Yoar 1. 2. 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) b. Explain why the company was able to issue the bonds for $19.820,734 rather than for the face amount of $18.400,000

Answer 1

Journal Entries for bond
Journal entries in the books of Synergy LLC
	Date	Particulars	Debit	Credit
1-	1-04-X1	Cash A/c Dr.	$19,820,734
		To Bonds Payable A/c		$18,400,000
		To Premium on Bonds Payable A/c		$1,420,734
		(Bonds issued at a premium recorded)
2-	1-10-X1	Interest Expense A/c Dr.	$961,927
		Premium on Bonds Payable A/c Dr.	$142,073
		To Interest Payable A/c		$1,104,000
		(Premium amortized = 1420734/5*6/12;
		Interest expense recorded [(18400000*12%*6/12)-142073.4]
	1-10-X1	Interest Payable A/c Dr.	$1,104,000
		To Cash A/c		$1,104,000
		(Interest duly paid)
3-	Reason for which company was able top sell the bonds at a premium (i.e., at a value higher than the face value pf the bonds:
		Interest rate plays a vital role in detremining the market value of the bonds. Here we were provided both with the market rate of the interest
		and the coupon rate of the bonds issued. Clearly the market rate of interest is lower than the coupon rate of the bonds.
		That means that for an investor who is looking for good interest rates must be interested more in buying this bonds for 12% of interest rather than investing
		in market for an interest rate of 10%.
		This also creates a relationship between interest rates and the Market value. Higher interest rate creates a high demand and thus investors are ready
		to invest more than the face vaalue of the bonds.
		Same is the case here, the 12% coupon rate created a high demand and hence were traded for a value more than the face value of the bonds.