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 d 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

a) cash a/c Dr. 2990264

to premium on bonds payable a/c 190264

to bond payable a/c 2800000

b) interest expenses a/c Dr. 61736

premium on bonds payable a/c Dr. 190264

to cash a/c 252000

c) the market rate of interest is the contract rate of interest.