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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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 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.

(a)

To determine

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Bonds Payable: Bonds payable are referred to long-term debts of the business, issued to various lenders known as bondholders, generally in multiples of $1,000 per bond, to raise fund for financing the operations.

Premium on bonds payable: It occurs when the bonds are issued at a high price than the face value.

To prepare: Journal entry to record issuance of the bonds.

Explanation

Prepare journal entry for issuance of bonds.

Date Account Title and Explanation Post Ref Debit ($) Credit ($)
April 1 Cash 20,811,010
Premium on Bonds Payable (1) 811,010
Bonds Payable 20,000,000
(To record issue of bonds at premium)

Table (1)

Working note:

Calculate premium on bonds payable...

b.

To determine

To prepare: Journal entry to record first interest payment and amortization of premium on bonds.

c.

To determine

To explain: The reason why the company was able to issue the bonds for $20,811,010 rather than $20,000,000.

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