Question

# On January 1, a company issues bonds dated January 1 with a par value of \$570,000....

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.

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.

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