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 8% and the bonds are sold for $405,830. The journal entry to record the first interest payment using the effective interest method of amortization is: (Rounded to the nearest dollar.)

a. Debit Bond Interest Expense 19,133.00; credit Premium on Bonds Payable $1,583.00; credit Cash $17,550.00
b. Debit Interest Payable $17,550.00; credit Cash $17,550.00
c. Debit Interest Expense $16,233; debit Premium on Bonds Payable $1,317; credit Cash $17,550.
d. Debit Bond Interest Expense $16,233.00; debit Discount on Bonds Payable $1,317.00; credit Cash $17,550.00.

Answer 1

Answer : C) Debit Interest Expenses $16,233, Debit Premium on Bond sPayable $1,317, Credit Cash $ 17,550

Face Valeu of Bond = $ 390,000

Issue Valeu = $405,830

Interest EXpenses = $405,830*85*6/12 = 16,233

Cash interest Paid = $390,000*9%*6/12 = $17,500

Premiumon bonds Payable Amortized = $ 17,500-$16,233 = $1,317

Debit : Interest  Expenses = $ 16,233

Debit : Premium on Bonds Payble = $ 1,317

Credit: Cash = $ 17,500