Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, 20Y1, Smiley issued $23,100,000 of five-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of $24,036,717. 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.1.Issuance of bonds on April 1, 20Y1.2.First interest payment on October 1, 20Y1, and amortization of bond premium for six months, using the straight-line method. (Round to the nearest dollar.) B. Explain why the company was able to issue the bonds for $24,036,717 rather than for the face amount of $23,100,000.The bonds sell for more than their face amount because the market rate of interest is the contract rate of interest. Investors willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate).

Number of half years=Number of years×2=5×2=10 half-years

Answered: Smiley Corporation wholesales repair…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, 20Y1, Smiley issued $23,100,000 of five-year, 9% bonds at a market (effective) interest rate of 8%, receiving cash of $24,036,717. 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.

1.	Issuance of bonds on April 1, 20Y1.
2.	First interest payment on October 1, 20Y1, and amortization of bond premium for six months, using the straight-line method. (Round to the nearest dollar.)

B. Explain why the company was able to issue the bonds for $24,036,717 rather than for the face amount of $23,100,000.

The bonds sell for more than their face amount because the market rate of interest is the contract rate of interest. Investors willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate).

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$\begin{array}{rcl} N u m b e r o f h a l f y e a r s & = & N u m b e r o f y e a r s \times 2 \\ = & 5 \times 2 \\ = & 10 h a l f - y e a r s \end{array}$

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