On October 1, 2020 MK Corporation issues a bond for $110,000 cash. The bond has a...

On October 1, 2020 MK Corporation issues a bond for $110,000 cash. The bond has a face value of $100,000. Interest is paid quarterly. On January 1, 2021 the company records the following entry for the first coupon payment:

Interest expense	5,500
Premium	500
Cash		6,000
(to record interest expense)

Which of the following would be included in the journal entry to record the next coupon payment which the company pays in cash on April 1, 2021?

		A. DEBIT to Interest Expense for $5,000
		B. DEBIT to Interest Expense for $5,525
		C. DEBIT to Interest Expense for $5,475
		D. DEBIT to Interest Expense for $5,500
		E. DEBIT to Interest Expense for $5,425
		F. DEBIT to Interest Expense for $5,225

Solutions

Expert Solution

ANSWER IS D = DEBIT to Interest Expense for $5,500

The entry for interest payments is a debit to interest expense and a credit to cash. If a discount or premium was recorded when the bonds were issued, the amount must be amortized over the life of the bonds. If the amount is small, it can be calculated on a straight-line basis.

We can amortized in straight line basis.so interest amount and premium should not change in installments.

---------------------------------------------------------------

Coupon rate = Total Annual Coupon Payment/par value of bond.

= 22000/100000= 5.5 %

Quarterly interest =22000/4= 5500

Quarterly premium amortization= 500

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A coupon payment on a bond is the annual interest payment that the bondholder receives from the bond's issue date until it matures. Coupons are normally described in terms of the coupon rate, which is calculated by adding the sum of coupons paid per year and dividing it by the bond's face value.

ekkarill92 answered 1 year ago

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