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

Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, 20Y1, Smiley issued $5,800,000 of 8-year, 9% bonds at a market (effective) interest rate of 7%, receiving cash of $6,501,457. Interest is payable semiannually on April 1 and October 1.

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a. Journalize the entry to record the issuance of bonds on April 1, 20Y1. If an amount box does not require an entry, leave it blank.

	Account	Debit	Credit
	Bonds PayableCashDiscount on Bonds PayableInterest PayablePremium on Bonds Payable	- Select -	- Select -
	Accounts PayableCashDiscount on Bonds PayableInterest PayablePremium on Bonds Payable	- Select -	- Select -
	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest Payable	- Select -	- Select -

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b. Journalize the entry to record the first interest payment on October 1, 20Y1, 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.

	Account	Debit	Credit
	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest Payable	- Select -	- Select -
	Accounts PayableBonds PayableCashDiscount on Bonds PayablePremium on Bonds Payable	- Select -	- Select -
	Bonds PayableCashDiscount on Bonds PayableInterest ExpensePremium on Bonds Payable	- Select -	- Select -

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c. Why was the company able to issue the bonds for $6,501,457 rather than for the face amount of $5,800,000? The market rate of interest is

greater than less than

the contract rate of interest.