Entries for Issuing Bonds and Amortizing Premium by Straight

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 $20,000,000 of five-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of $20,811,010. 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. For a compound transaction, 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.) For a compound transaction, if an amount box does not require an entry, leave it blank. c. Why was the company able to issue the bonds for $20,811,010 rather than for the face amount of $20,000,000?

Solution

Answer:

A)

Account/ Description

Debit

Credit

Cash

$20,811,010

Bonds Payable

$20,000,000

Premium on Bonds Payable

$811,010

___________________________________

b)

Account/ Description

Debit

Credit

Interest Expense (900,000 – 81,101 )

818899

Premium on Bonds Payable (811,010/10)

81101

Cash (20,000,000*9%*1/2)

900000

____________________________________

c)

Company can issue at price 20,811,010 instead of 20,000,000 because coupon rate of company is higher than the effective rate of interest so company is able to issue the bonds have been issued at a premium.

Account/ Description	Debit	Credit
Cash	$20,811,010
Bonds Payable		$20,000,000
Premium on Bonds Payable		$811,010