Question

On January 1, a company issues bonds dated January 1 with a par value of $770,000. The bonds mature in 3 years. The contract rate is 8%, and interest is paid semiannually on June 30 and December 31. The bonds are sold for $761,000. The journal entry to record the first interest payment using straight-line amortization is:

Multiple Choice

• Debit Interest Payable $30,800; credit Cash $30,800.

• Debit Interest Expense $30,800; credit Cash $30,800.

• Debit Interest Expense $32,300; credit Discount on Bonds Payable $1,500; credit Cash $30,800.

• Debit Interest Expense $29,300; debit Discount on Bonds Payable $1,500; credit Cash $30,800.

• Debit Interest Expense $30,800; credit Premium on Bonds Payable $1,500; credit Cash $29,300.

Answer 1

Solution:

Journal entry:

Date	Account title and explanation	Debit	Credit
	Interest expense	$32,300
	Discount on bonds payable		$1,500
	cash		$30,800

working:

Total Discount on issue of bond = Par value of bonds issued - Issue value of bonds issued

=$770,000 -$761,000

=$9,000

Amortization of discount on issue of bond per year = Total discount on issue of bonds / Maturity period of bonds

=$9,000/3

=$3,000

Semi-annual amortization of discount on bonds = Amortization of discount on issue of bond per year * 6/12

=$3,000 *6.12

=$1,500

Semi-annual interest = Par value of bonds * Contract rate * 6/12

=$770,000*8%*6/12

=$30,800

Therefor the correct option is Debit Interest Expense $32,300; credit Discount on Bonds Payable $1,500; credit Cash $30,800.

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