Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley Corporation issued $18,400,000 of five-year, 8% bonds at a market (effective) interest rate of 7%, receiving cash of $19,165,153. Interest is payable semiannually on April 1 and October 1.
Required:
A. | Journalize the entries to record the following. Refer to the
Chart of Accounts for exact wording of account titles.
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B. | Explain why the company was able to issue the bonds for $19,165,153 rather than for the face amount of $18,400,000. |
Chart of Accounts
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General Ledger | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Journal
A. Journalize the entries. Refer to the Chart of Accounts for exact wording of account titles.
A) | Journal Entries | |||||||
Date | Account titles & Explanations | Debit | Credit | |||||
1-Apr | Cash | 19,165,153 | ||||||
premium on bonds payable | 765,153 | |||||||
Bonds payable | 18,400,000 | |||||||
1-Oct | interest expense | 659485 | ||||||
premium on bonds payable | (765153/10 | 76515 | ||||||
Cash | (18,400,000*8%*1/2) | 736000 | ||||||
2) | the market rate of 7% is lower than the contract rate of 8% | |||||||
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