On January 1,your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $10,866.Your company used the effective-interest method of amortization.At the end of the first year,your company should:
A) debit Interest Expense for $543, debit Premium on Bonds Payable for $157, and credit Interest Payable for $700.
B) debit Interest Expense for $700, credit Premium on Bonds Payable for $157, and credit Interest Payable for $543.
C) debit Interest Expense for $700, debit Premium on Bonds Payable for $157, and credit Interest Payable for $543.
D) debit Interest Expense for $543 and credit Interest Payable for $543.

Question

Quizplus · Accepted Answer

The interest expense is calculated using the market rate (5%) on the carrying amount of the bond ($10,866), resulting in $543. The stated interest payment is $700 (7% of $10,000). The difference of $157 is the amortization of the premium, which is debited to Premium on Bonds Payable.

On January 1,your Company Issues a 5-Year Bond with a Face