On January 1, a company issues bonds dated January 1 with a par value of $390,00
ID: 3010600 • Letter: O
Question
On January 1, a company issues bonds dated January 1 with a par value of $390,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $374,937. The journal entry to record the first interest payment using the effective interest method of amortization is:
On January 1, a company issues bonds dated January 1 with a par value of $390,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $374,937. The journal entry to record the first interest payment using the effective interest method of amortization is:
Explanation / Answer
Debit interest expense = 374937*10%*(1/2) = 374937*0.10*(1/2) = $18746.85
Credit cash = 390000*9%*5 = 390000*0.09*5 = $175500
Credit discount on bounds payable = Cash credit - Debit Interest Expense = $175500 - $18746.85 = $156753.15