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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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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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Section
BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 14, Problem 7E
Textbook Problem
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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:

  1. a. Issuance of bonds on April 1.
  2. 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.
  3. 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

Prepare journal entry to record issuance of the bonds.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued 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.

Prepare journal entry for issuance of bonds.

DateAccount Title and ExplanationPost RefDebit ($)Credit ($)
April 1Cash  20,811,010 
 Premium on Bonds Payable (1)  811,010
   Bonds Payable  20,000,000
    (To record issue of bonds at premium)   

Table (1)

  • Cash is an asset and it is increased...

b.

To determine

Prepare journal entry to record first interest payment and amortization of premium on bonds.

c.

To determine

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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Chapter 14 Solutions

Financial Accounting
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