Warner Company issued $4,000,000 of 6%, 10-year bonds on one of its interest dates for $3,454,800 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used. The journal entry to be recorded at the end of the second year for the payment of interest and the amortization of discount will include a
A) debit to Bond Interest Expense for $240,000.
B) credit to Cash for $279,295.
C) credit to Discount on Bonds Payable for $36,384.
D) credit to Discount on Bonds Payable for $39,295.

Question

Quizplus · Accepted Answer

The effective interest expense for the second year is calculated as the carrying amount of the bonds at the beginning of the year multiplied by the effective interest rate. The difference between this interest expense and the cash interest payment is the amortization of the discount. The correct credit to Discount on Bonds Payable is $39,295.

Warner Company Issued $4,000,000 of 6%, 10-Year Bonds on One