Warner Company issued $5,000,000 of 6%, 10-year bonds on one of its interest dates for $4,318,500 to yield an effective annual rate of 8%.The effective-interest method of amortization is to be used.The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include a
A)debit to Bond Interest Expense for $300,000.
B)credit to Cash for $345,481.
C)credit to Discount on Bonds Payable for $45,480.
D)debit to Bond Interest Expense for $400,000.

Question

Quizplus · Accepted Answer

The bond interest expense is calculated using the effective interest rate on the carrying amount of the bonds. The carrying amount is $4,318,500 and the effective interest rate is 8%, so the interest expense is $4,318,500 * 8% = $345,480. The cash paid for interest is $5,000,000 * 6% = $300,000. The difference of $45,480 is the amortization of the discount, which is credited to Discount on Bonds Payable.

Warner Company Issued $5,000,000 of 6%, 10-Year Bonds on One