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 $6,800,000 of 9-year, 11% bonds at a market (effective) interest rate of 8%, receiving cash of $8,091,249. 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 $8,091,249 rather than for the face amount of $6,800,000?

Answer 1

a) Journal entry

Date	account and explanation	Debit	Credit
Apr 1	Cash	8091249
	Bonds payable		6800000
	Premium on bonds payable		1291249

b) Journal entry

Date	account and explanation	Debit	Credit
Oct 1	Interest expense	302264
	Premium on bonds payable (1291249/18)	71736
	Cash (6800000*11%*6/12)		374000

c) Because market interest rate is lower than stated interest rate