Question

On January 1, a business issues \$100,000 face value, 5 year, 10% contract rate bonds dated...

On January 1, a business issues \$100,000 face value, 5 year, 10% contract rate bonds dated January 1. Interest is payable ANNUALLY each December 31. The bonds were issued at a discount of \$7,210 to reflect a market interest rate of 12%.

Prepare the necessary journal entries to record total interest expense for the FIRST interest period.

Par value of bonds = \$100,000

Contract rate = 10%

Bond discount = \$7,210

Issue price = Par value of bonds - Bond discount

= 100,000 - 7,210

= \$92,790

Cash interest payment = Par value of bonds x Contract rate

= 100,000 x 10%

= \$10,000

Market interet rate = 12%

First year interest expense = Issue price x Market interet rate

= 92,790 x 12%

= \$11,135

Amortization of bond discount = First year interest expense - Cash interest payment

= 11,135 - 10,000

= \$1,135

Journal

 Account Title and Explanation Debit Credit Interest expense 11,135 Discount on bonds payable 1,135 Cash 10,000

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