On January 1, a company issues bonds dated January 1 with a par value of $400,00
ID: 2375540 • Letter: O
Question
On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using straight-line amortization is:
A. Debit Interest Payable $14,000.00; credit Cash $14,000.00.
B. Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C. Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
D. Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
E. Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash $14,000.00.
Explanation / Answer
cash =400000 * 7% * 1/2 = 14000
discount amortised = (400000- 383793) /10 = 1602.70
interestexpense= 15602.70
hencethe answer is
C)Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.