Question
Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, 20Y1, Smiley issued $21,300,000 of five-year, 4% bonds at a market (effective) interest rate
Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, 20Y1, Smiley issued $21,300,000 of five-year, 4% bonds at a market (effective) interest rate of 3%, receiving cash of $22,282,220. 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.
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b. Explain why the company was able to issue the bonds for $22,282,220 rather than for the face amount of $21,300,000. |
CHART OF ACCOUNTSSmiley CorporationGeneral Ledger
ASSETS | |
110 | Cash |
111 | Petty Cash |
121 | Accounts Receivable |
122 | Allowance for Doubtful Accounts |
126 | Interest Receivable |
127 | Notes Receivable |
131 | Merchandise Inventory |
141 | Office Supplies |
142 | Store Supplies |
151 | Prepaid Insurance |
191 | Land |
192 | Store Equipment |
193 | Accumulated Depreciation-Store Equipment |
194 | Office Equipment |
195 | Accumulated Depreciation-Office Equipment |
LIABILITIES | |
210 | Accounts Payable |
221 | Salaries Payable |
231 | Sales Tax Payable |
232 | Interest Payable |
241 | Notes Payable |
251 | Bonds Payable |
252 | Discount on Bonds Payable |
253 | Premium on Bonds Payable |
EQUITY | |
311 | Common Stock |
312 | Paid-In Capital in Excess of Par-Common Stock |
315 | Treasury Stock |
321 | Preferred Stock |
322 | Paid-In Capital in Excess of Par-Preferred Stock |
331 | Paid-In Capital from Sale of Treasury Stock |
340 | Retained Earnings |
351 | Cash Dividends |
352 | Stock Dividends |
REVENUE | |
410 | Sales |
610 | Interest Revenue |
611 | Gain on Redemption of Bonds |
EXPENSES | |
510 | Cost of Merchandise Sold |
515 | Credit Card Expense |
516 | Cash Short and Over |
521 | Sales Salaries Expense |
522 | Office Salaries Expense |
531 | Advertising Expense |
532 | Delivery Expense |
533 | Repairs Expense |
534 | Selling Expenses |
535 | Rent Expense |
536 | Insurance Expense |
537 | Office Supplies Expense |
538 | Store Supplies Expense |
541 | Bad Debt Expense |
561 | Depreciation Expense-Store Equipment |
562 | Depreciation Expense-Office Equipment |
590 | Miscellaneous Expense |
710 | Interest Expense |
711 | Loss on Redemption of Bonds |
Journalize the entries. Refer to the Chart of Accounts for exact wording of account titles. Round to the nearest dollar.
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JOURNAL
ACCOUNTING EQUATION
DATE | DESCRIPTION | POST. REF. | DEBIT | CREDIT | ASSETS | LIABILITIES | EQUITY | |
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b. Explain why the company was able to issue the bonds for $22,282,220 rather than for the face amount of $21,300,000.
The bonds sell for more than their face amount because the market rate of interest is the contract rate of interest. Investors willing to pay more for bonds that pay a higher rate of interest (contract rate) than the rate they could earn on similar bonds (market rate).
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