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.

Homework Answers

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.

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