Question

QUESTION 2 On January 1, Soren Enterprises issued 15-year bonds with a face value of $100,000. The bonds carry a contract interest rate of 8 percent, and interest is paid semi-annually. On the issue date, the annual market interest rate for bonds issued by companies with similar riskiness was 10 percent. The issuance price of the bonds was $84,628. Which ONE of the following would be included in the journal entry necessary on the books of the bond issuer to record the SECOND interest payment on December 31 of Year 1? Use effective-interest amortization of the bond discount. DEBIT to Interest Expense of $4,000.00 DEBIT to Discount on Bonds Payable of $231.40 DEBIT to Discount on Bonds Payable of $242.97 CREDIT to Interest Expense of $4,000.00 CREDIT to Discount on Bonds Payable of $231.40 CREDIT to Discount on Bonds Payable of $242.97

Answer #1

Par value of bonds = $100,000

Semi annual interest payment = 100,000 x 8% x 6/12

= $4,000

Effective interest rate = 8%

Semi annual Effective interest rate = 5%

Issue price of bonds = $84,628

Discount on bonds payable = Par value of bonds - Issue price of bonds

= 100,000 - 84,628

= $15,372

Date |
Cash paid |
Interest expense |
Change in carrying value |
Carrying value |

Jan. 1 |
84,628 |
|||

June 30 |
4,000 |
84,628 x 5% = |
4,231.4 - 4,000 = 231.4 |
84,628 + 231.4 = 84,859.4 |

Dec. 31 |
4,000 |
84,859.4 x 5% = 4,242.97 |
4,242.97 - 4,000 = 242.97 |
84,859.4 + 242.97 = 85,102.37 |

Journal entry necessary on the books of the bond issuer to record the SECOND interest payment on December 31 of Year 1 WOULD BE as under:

Dec. 31 | Interest expense | 4,242.97 | |

Discount on bonds payable | 242.97 | ||

Cash | 4,000 |

Sixth option is correct.

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