MC Qu. 155 On January 1, a company issues... On January 1, a company issues bonds...

MC Qu. 155 On January 1, a company issues...

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the first interest payment using straight-line amortization is:

Multiple Choice

Debit Interest Payable $14,000.00; credit Cash $14,000.00.
Debit Interest Expense $14,000.00; credit Cash $14,000.00.
Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash $14,000.00.

Expert Solution

Answer : Option D .

Date	Account Title and Explanation	Debit	Credit
	Interest Expense	$ 15,620.70
	Discount on Bond Payable		$ 1,620.70
	Cash		$ 14,000

Explanation ;

Bond Face Value = $ 400,000

Issue Price = $ 383,793

Discount on issue = $ 400,000 - $ 383,793 = $ 16,207

Term = 5 years

Period = 5 * 2 = 10

Amortization of discount per period = $ 16,207 / 10 = $ 1,620.70

Interest Payable ( Cash) = $400,000 * .07 * 1/2 = $ 14,000

Interest Expense = $ 14,000 + 1620.7 = $ 15,620.70

ekkarill92 answered 2 years ago

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