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On January 1, Soren Enterprises issued 15-year bonds with a face value of $200,000. The bonds...

On January 1, Soren Enterprises issued 15-year bonds with a face value of $200,000. The bonds carry a contract interest rate of 8 percent, and interest is paid semi-annually. On the issue date, the annual market interest rate for bonds issued by companies with similar riskiness was 10 percent. The issuance price of the bonds was $169,255. Which ONE of the following would be included in the journal entry necessary on the books of the bond issuer to record theSECOND interest payment on December 31 of Year 1? Use effective-interest amortization of the bond discount.

DEBIT to Interest Expense of $8,000.00

DEBIT to Discount on Bonds Payable of $485.89

DEBIT to Discount on Bonds Payable of $462.75

CREDIT to Interest Expense of $8,000.00

CREDIT to Discount on Bonds Payable of $485.89

CREDIT to Discount on Bonds Payable of $462.75

Solutions

Expert Solution

Correct Option is “Credit to Discount on Bonds Payable of $485.89”

Face Value of Bonds = $200,000
Issue Value of Bonds = $169,255

Annual Coupon Rate = 8.00%
Semiannual Coupon Rate = 4.00%
Semiannual Coupon = 4.00% * $200,000
Semiannual Coupon = $8,000

Annual Interest Rate = 10.00%
Semiannual Interest Rate = 5.00%

First Interest Payment:

Beginning Carrying Value = $169,255

Interest Expense = 5.00% * $169,255
Interest Expense = $8,462.75

Amortization of Discount = $8,462.75 - $8,000.00
Amortization of Discount = $462.75

Ending Carrying Value = $169,255 + $462.75
Ending Carrying Value = $169,717.75

Second Interest Payment:

Beginning Carrying Value = $169,717.75

Interest Expense = 5.00% * $169,717.75
Interest Expense = $8,485.89

Amortization of Discount = $8,485.89 - $8,000.00
Amortization of Discount = $485.89

Journal Entry to Record second interest payment will include:
Debit to Interest Expense for $8,485.89
Credit to Discount on Bonds Payable for $485.89
Credit to Cash for $8,000.00

ekkarill92 answered 2 years ago
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