On January 1, a company issues bonds dated January 1 with a par value of $370,00
ID: 2476838 • Letter: O
Question
On January 1, a company issues bonds dated January 1 with a par value of $370,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 12% and the bonds are sold for $356,386. The journal entry to record the first interest payment using the effective interest method of amortization is:
Debit Interest Expense $19,316.84; debit Premium on Bonds Payable $1,033.16; credit Cash $20,350.00.
Debit Interest Payable $20,350.00; credit Cash $20,350.00.
Debit Interest Expense $19,316.84; debit Discount on Bonds Payable $1,033.16; credit Cash $20,350.00.
Debit Interest Expense $21,383.16; credit Discount on Bonds Payable $1,033.16; credit Cash $20,350.00.
Debit Interest Expense $21,383.16; credit Premium on Bonds Payable $1,033.16; credit Cash $20,350.00.
Explanation / Answer
Premium to be amortize every interest period = (374,613 - 360,000)/(5*2) = $1,461.3
Option 1 and 2 are same. So either of the option is correct.
Date Accounts Titles and Explanation Debit Credit Interest Expense $14,738.70 Premium on Bonds Payable $1,461.30 Cash $16,200.00