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 $8,800,000 of 10-year, 7% bonds at a market (effective) interest rate of 4%, receiving cash of $10,958,390. 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.

blank	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds Payable	- Select -	- Select -
	Accounts PayableCashDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds Payable	- Select -	- Select -
	Accounts PayableBonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest Payable	- Select -	- Select -

Question Content Area

b. Journalize the entry to record the first interest payment on October 1, 20Y1, and amortization of bond premium for six months, using the straight-line method. Round to the nearest dollar. If an amount box does not require an entry, leave it blank.

blank	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest PayableInterest Receivable	- Select -	- Select -
	Bonds PayableCashDiscount on Bonds PayableInterest PayableInterest ReceivablePremium on Bonds Payable	- Select -	- Select -
	Bonds PayableCashDiscount on Bonds PayableInterest ExpenseInterest PayablePremium on Bonds Payable	- Select -	- Select -

Question Content Area

c. Why was the company able to issue the bonds for $10,958,390 rather than for the face amount of $8,800,000? The market rate of interest is

greater than less than

the contract rate of interest.