Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley issued $7,400,000 of 9-year, 6% bonds at a market (effective) interest rate of 5%, receiving cash of $7,931,074. Interest is payable semiannually on April 1 and October 1. a. Journalize the entry to record the issuance of bonds on April 1, Year 1. For a compound transaction, if an amount box does not require an entry, leave it blank. b. Journalize the entry to record the 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.) For a compound transaction, if an amount box does not require an entry, leave it blank. c. Why was the company able to issue the bonds for $7,931,074 rather than for the face amount of $7,400,000? The market rate of interest is the contract rate of interest.

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Business

Hector

29 July, 16:03

Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley issued $7,400,000 of 9-year, 6% bonds at a market (effective) interest rate of 5%, receiving cash of $7,931,074. Interest is payable semiannually on April 1 and October 1. a. Journalize the entry to record the issuance of bonds on April 1, Year 1. For a compound transaction, if an amount box does not require an entry, leave it blank. b. Journalize the entry to record the 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.) For a compound transaction, if an amount box does not require an entry, leave it blank. c. Why was the company able to issue the bonds for $7,931,074 rather than for the face amount of $7,400,000? The market rate of interest is the contract rate of interest.

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Answers (1)

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Samir Holloway · Answer 1

issuance of the bond:

cash 7,931,074

bonds payable 7,400,000

premium on bond payable 531,074

first interest payment:

interest expense 198,276.85

amortization on premium 23,723.15

cash 222,000

It issue the bond for a higher value than face value because, their bond give a higher yield than similar bonds in the market.

Therefore investor purchase at a higher cost to balance the nominal rate of the bonds with the market rate.

Explanation:

issuance:

cash received - face value = premium

first interest payment:

carrying value x market rate = interest expense

7,931,074 x 0.05%/2 = 198,276.85

cash disbursement: 7,400,000 x 0.06/2 = 222,000

amortization on premium 23,723.15