Question

On January 1, a company issues bonds dated January 1 with a par value of $710,000. The bonds mature in 3 years. The contract rate is 8%, and interest is paid semiannually on June 30 and December 31. The bonds are sold for $698,000. The journal entry to record the first interest payment using straight-line amortization is:

Multiple Choice

Debit Interest Expense $30,400; credit Discount on Bonds Payable $2,000; credit Cash $28,400.

Debit Interest Expense $28,400; credit Premium on Bonds Payable $2,000; credit Cash $26,400.

Debit Interest Expense $28,400; credit Cash $28,400.

Debit Interest Payable $28,400; credit Cash $28,400.

Debit Interest Expense $26,400; debit Discount on Bonds Payable $2,000; credit Cash $28,400.

Answer 1

The Answer is “Debit Interest Expense $30,400; credit Discount on Bonds Payable $2,000; credit Cash $28,400”

The journal entry to record the first interest payment using straight-line amortization is:

Accounts Tittles and explanations	Debit ($)	Credit ($)
Interest Expenses A/c	30,400
To Discount on Bond Payable A/c		2,000
To Cash A/c		28,400
[Journal entry to record the first interest payment using straight-line amortization]

Discount on Issue of Bond

= Face Value of the bond – Issue Price

= $710,000 – 698,000

= $12,000

Amortization of Discount on Issue of Bond during each semiannual period using straight line method of amortization

= $12,000 / 6 periods

= $2,000

Semiannual Interest = Face value of the bond x Coupon rate x ½

= $710,000 x 8% x ½

= $28,400