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On January 1, a company issues bonds dated January 1, 2018 with a par value of...

On January 1, a company issues bonds dated January 1, 2018 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid annually on December 31. The bonds are sold for $312,200. The journal entry to record the first interest payment using straight-line amortization is:

Muheet Corporation issues $550,000, 10%, 5-year bonds on January 1, 2019 for $489,000. Interest is paid annually on January 1. If Muheet Corporation uses the straight-line method of amortization of bond discount, the amount of interest expense recorded at December 31, 2019 would be:
Select one:
a. $55,000.
b. $42,800.
c. $61,000.
d. $67,200.

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Expert Solution

QUESTION 1

On January 1, a company issues bonds dated January 1, 2018 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid annually on December 31. The bonds are sold for $312,200. The journal entry to record the first interest payment using straight-line amortization is:

ANSWER

Par value - $300,000

Years to maturity – 5 Years

Contract Rate – 9%

Current Price - $312,200

Method – Straight line method

Premium = current price – par value

                  $312200-$300000=12200

Each year amortized cost= 12200/5=2440

DATE

ACCOUNT

DEBIT

CREDIT

Dec 31

Interest expense(27000-2440)

$24560

Amortization of bond premium

$2440

Cash(300000*0.09)

$27000

QUESTION 2

Muheet Corporation issues $550,000, 10%, 5-year bonds on January 1, 2019 for $489,000. Interest is paid annually on January 1. If Muheet Corporation uses the straight-line method of amortization of bond discount, the amount of interest expense recorded at December 31, 2019 would be:
Select one:
a. $55,000.
b. $42,800.
c. $61,000.
d. $67,200.

ANSWER 2 will be option (D). $67200

Par value - $550,000

Years to maturity – 5 Years

Contract Rate – 10%

Current Price - $489,000

Method – Straight line method

Discount = par value- current price

                  $550,000-$489,000 = $61000

Each year amortized cost= 61000/5 = 12200

Journal entry would be

Dr. Interest expense      67200

Cr. Amortization of bond discount           12200

Cr.   Cash (550000*0.1)                            55000

ANSWER

Interest expense $ 67200

ekkarill92 answered 2 years ago
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