A corporation issues $200,000, 8%, 5-year bonds on January 1, 2014, for $208,400. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond premium, the amount of bond interest expense to be recognized in December 31, 2014's adjusting entry is
A) $14,320.
B) $16,000.
C) $17,680.
D) $1,680.

Question

Quizplus · Accepted Answer

The bond premium is $8,400 ($208,400 - $200,000) and is amortized over 5 years, resulting in an annual amortization of $1,680 ($8,400 / 5). The annual interest payment is $16,000 ($200,000 * 8%). Therefore, the bond interest expense is $16,000 - $1,680 = $14,320.

A Corporation Issues $200,000, 8%, 5-Year Bonds on January 1