On January 1, a company issues bonds dated January 1 with a par value of $500,00
ID: 2589060 • Letter: O
Question
On January 1, a company issues bonds dated January 1 with a par value of $500,000. 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 $481,603. The journal entry to record the first interest payment using straight-line amortization is:
Debit Interest Payable $27,500.00; credit Cash $27,500.00.
Debit Interest Expense $27,500.00; credit Cash $27,500.00.
Debit Interest Expense $25,660.30; debit Discount on Bonds Payable $1,839.70; credit Cash $27,500.00.
Debit Interest Expense $29,339.70; credit Discount on Bonds Payable $1,839.70; credit Cash $27,500.00.
Debit Interest Expense $29,339.70; credit Premium on Bonds Payable $1,839.70; credit Cash $27,500.00.
On January 1, a company issues bonds dated January 1 with a par value of $500,000. 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 $481,603. The journal entry to record the first interest payment using straight-line amortization is:
Explanation / Answer
Correct option is:
Debit Interest Expense $29,339.70; credit Discount on Bonds Payable $1,839.70; credit Cash $27,500.00.
Explanation:
As bonds are issued on discount, this discount is to be amortized in 10 semiannual equal installments. Discount amortised per semiannual period is:
=(500,000-481,603)/10
=$1839.70
So following journal entry will be passed:
Interest expense $29,339.70 Discount on bonds payable $1839.70 Cash(500000×11%×1/2) $27,500