Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley issued $24,200,000 of five-year, 11% bonds at a market (effective) interest rate of 9%, receiving cash of $26,114,936. 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, Year 1. 2. 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.) b. Explain why the company was able to issue the bonds for $26,114,936 rather than for the face amount of $24,200,000.
Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley issued $24,200,000 of five-year, 11% bonds at a market (effective) interest rate of 9%, receiving cash of $26,114,936. 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, Year 1. 2. 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.) b. Explain why the company was able to issue the bonds for $26,114,936 rather than for the face amount of $24,200,000.
Financial Accounting
14th Edition
ISBN:9781305088436
Author:Carl Warren, Jim Reeve, Jonathan Duchac
Publisher:Carl Warren, Jim Reeve, Jonathan Duchac
Chapter14: Long-term Liabilities: Bonds And Notes
Section: Chapter Questions
Problem 6PA: Saverin, Inc. produces and sells outdoor equipment. On July 1, 2016, Saverin, Inc. issued 62,500,000...
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Question
Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley issued $24,200,000 of five-year, 11% bonds at a market (effective) interest rate of 9%, receiving cash of $26,114,936. Interest is payable semiannually on April 1 and October 1.
Required:
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b. Explain why the company was able to issue the bonds for $26,114,936 rather than for the face amount of $24,200,000. |
Chart of Accounts
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Journal
Journalize the entries. Refer to the Chart of Accounts for exact wording of account titles.
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JOURNAL
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Final Question
b. Explain why the company was able to issue the bonds for $26,114,936 rather than for the face amount of $24,200,000.
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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