Instructions Smiley or oration wholesales repair products to equ ment manufactur
ID: 2541254 • Letter: I
Question
Instructions Smiley or oration wholesales repair products to equ ment manufacturers. On April 1 Year 1 ,S e ssue d S 3 1 O of year, g%bonds at a market effective interest rate of % receiving cash of $24,036,717 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 $24,036,717 rather than for the face amount of $23,100,000.Explanation / Answer
a) Premium on bonds to be amortized = Cash received - Face Value of Bond
= $24,036,717 - $23,100,000 = $936,717
Total semiannual periods = 5 years*2 semiannual periods = 10 periods
Premium to be amortized semiannually = $936,717/10 periods = $93,672 per period
1&2) Journal Entries (Amounts in $)
b) The interest rate on bonds payable of 9% is more than the market (effective) interest rate of 8%, therefore the company was able to issue the bonds for $24,036,717 rather than for the face amount of $23,100,000 (i.e. more than the face amount).
Date Description Post Ref. Debit Credit April 1 Cash 24,036,717 Premium on Bonds 936,717 9% Bonds Payable 23,100,000 (To record the issue of bonds) Oct. 1 Interest Expense (1,039,500 - 93,671.70) 945,828 Premium on Bonds 93,672 Cash ($23,100,000*9%*6/12) 1,039,500 (To record the first interest payment)