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Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley Corporation issued $18,400,000 of five-year, 12% bonds at a market (effective)

Smiley Corporation wholesales repair products to equipment manufacturers. On April 1, Year 1, Smiley Corporation issued $18,400,000 of five-year, 12% bonds at a market (effective) interest rate of 10%, receiving cash of $19,820,734. 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.
2. First interest payment on October 1 and amortization of bond premium for six months, using the straight-line method. The bond premium amortization is combined with the semiannual interest payment (Round to the nearest dollar.)
B. Explain why the company was able to issue the bonds for $19,820,734 rather than for the face amount of $18,400,000.

Chart of Accounts

CHART OF ACCOUNTS
Smiley Corporation
General 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
390 Income Summary
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

Journal

A. Journalize the entries. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 10

JOURNAL

ACCOUNTING EQUATION

DATE DESCRIPTION POST. REF. DEBIT CREDIT ASSETS LIABILITIES EQUITY

1

2

3

4

5

6

Final Question

B. Explain why the company was able to issue the bonds for $19,820,734 rather than for the face amount of $18,400,000.

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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