Question

On January 1, a company issues bonds dated January 1 with a par value of $570,000. The bonds mature in 5 years. The contract rate is 8%, and interest is paid semiannually on June 30 and December 31. The market rate is 9% and the bonds are sold for $547,433. The journal entry to record the second interest paymentusing the effective interest method of amortization is:

Multiple Choice

Debit Interest Expense $24,717.02; credit Discount on Bonds Payable $1,917.02; credit Cash $22,800.00.

Debit Interest Expense $20,965.53; debit Premium on Bonds Payable $1,834.47; credit Cash $22,800.00.

Debit Interest Expense $24,634.47; credit Discount on Bonds Payable $1,834.47; credit Cash $22,800.00.

Debit Interest Expense $20,965.53; debit Discount on Bonds Payable $1,834.47; credit Cash $22,800.00.

Debit Interest Payable $22,800.00; credit Cash $22,800.00.

Answer 1

Solution:

Face value of bond= $570,000

Contract rate = 8% or 4% semi annual

Cash Paid for Interest semi- annually = $570,000*4% = $22,800

Market rate = 9% or 4.5% semi annual

Interest Expense = Carrying Value*4.5%

Bond Amortization Schedule
Period	Cash Paid	Interest Expense	Discount Amortized	Carrying Value
01-Jan				$5,47,433.00
30-Jun	$22,800.00	$24,634.00	$1,834.00	$5,49,267.00
31-Dec	$22,800.00	$24,717.02	$1,917.02	$5,51,184.02

Journal entry to record second interest payment using the effective interest method of amortization:

Interest Expense Dr	$24,717.02
To Discount on Bond Payable		$1,917.02
To Cash		$22,800.00

Hence first option is correct.