On January 1, your company issues a 5-year bond with a face value of $10,000 and
ID: 2595164 • Letter: O
Question
On January 1, your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 696. The market interest rate is 4%. The issue price of the bond was $11,056. Your company used the effective-interest method of amortization. At the end of the first year, your company should debit Interest Expense for $442, debit Premium on Bonds Payable for $158, and credit Cash for $600 debit Interest Expense for $442 and credit Interest Payable for $442 O debit Interest Expense for $600, debit Premium on Bonds Payable for $158, and credit Interest Payable for $442. O debit Interest Expense for $600, credit Premium on Bonds Payable for $158, and credit Interest Payable for $442.Explanation / Answer
At the end of first year, the company should debit Interest expense for $600, credit premium on Bonds payable for $158 and credit Interest payable for $442.
In effective interest amortization method, the market rate of interest is used for calculating effective interest
Interest expense to be paid at the end of year = $10,000*6% = $600 (Debited)
Effective interest payable = $11,056*4% = $442 (Credited)
Premium on Bonds payable amortized at the end of year = $600-$442 = $158 (Credited)