Question

# On January 1, a company issues bonds dated January 1 with a par value of \$710,000....

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.

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

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