Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley Corporation 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. Journalize the entries to record the following:a. Issuance of bonds on April 1.b. First interest payment on October 1 and amortization of bond premium for six months, using the straight-line method. The bond premium amortization is combined with the semiannual interest payment. Round to the nearest dollar.c. Explain why the company was able to issue the bonds for $20,811,010 rather than for the face amount of $20,000,000.

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Asked Dec 19, 2019
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Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley Corporation 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. Journalize the entries to record the following:
a. Issuance of bonds on April 1.
b. First interest payment on October 1 and amortization of bond premium for six months, using the straight-line method. The bond premium amortization is combined with the semiannual interest payment. Round to the nearest dollar.
c. Explain why the company was able to issue the bonds for $20,811,010 rather than for the face amount of $20,000,000.

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Expert Answer

Step 1

a. Prepare the journal entry to record the issuance of bonds on April 1.

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Debit (S) Credit (S) Date Accounts title and explanation $ 20,811,010 Apr-01 Cash Premium on bonds payable $ 811,010 $ 20,000,000 ($20,811,010-$20,000,000) Bonds payable |(To record issue of bonds at premium)

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Step 2

b. Prepare the journal entry to record the first interest pay...

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Accounts title and explanation Interest expense Oct-01 [($20,000,000x9%x6/12)-$81,101] Premium on bonds payable |(S811,010÷10) Cash Credit (S) Debit (S) Date $ 818,899 $ 81,101 $ 900,000 |(To record the semianmual payment of interest and amortization of premium on bonds)

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