Entries for issuing bonds and amortizing premium by straight$-$line method

Smiley Corporation wholesales repair products to equipment manufacturers. On April $1,20$Y$1,$ Smiley issued $$5,900,000$ of $5-$year, $8\%$ bonds at a market $($effective$)$ interest rate of $6\%,$ receiving cash of $$6,403,282.$ Interest is payable semiannually on April $1$ and October $1.$

Question Content Area

a$.$ Journalize the entry to record the issuance of bonds on April $1,20$Y$1.$ If an amount box does not require an entry, leave it blank.

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Cash

$6,403,282$

Premium on Bonds Payable

$5,900,000$

Bonds Payable

$503,282$

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Feedback

Bonds Payable is always recorded at face value. Any difference in issue price is reflected in a premium or discount account.

The straight$-$line method of amortization provides equal amounts of amortization over the life of the bond.

Question Content Area

b$.$ Journalize the entry to record the first interest payment on October $1,20$Y$1,$ and amortization of bond premium for $6$ months, using the straight$-$line method. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

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Interest Expense

Premium on Bonds Payable

Cash

Question Content Area

c$.$ Why was the company able to issue the bonds for $$6,403,282$ rather than for the face amount of $$5,900,000?$

The market rate of interest is

greater than

the contract rate of interest.