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 $4,600,000 of 7-year, 12% bonds at a market (effective) interest rate of 9%, receiving cash of $5,305,375. 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 5,305,375 Premium on Bonds Payable 4,600,000 X Bonds Payable

Answer 1

Solution a:

Journal Entries - Smiley Corporation
Date	Particulars	Debit	Credit
Apr 1, Year 1	Cash Dr	$5,305,375.00
	To Bond Payable		$4,600,000.00
	To Premium on Bond Payable		$705,375.00
	(To record issue of bond at premium)

Solution b:

Journal Entries - Smiley Corporation
Date	Particulars	Debit	Credit
Oct 1, Year 1	Interest Expense Dr	$225,616.00
	Premium on bond payable Dr ($705,375/14)	$50,384.00
	To Cash ($4,600,000*6%)		$276,000.00
	(To record interest payment and premium amortization)

Solution c:

The company able to issue bond at premium because the market rate of interest is lower than contract rate of interest.