The Amazing Widget Company issues $515,000 of 12%,10-year debentures at 105 on 30 April 2017.The debentures pay interest on 30 April and 31 October.Assume that the company uses the straight-line method for amortisation.What is the journal entry to record the first interest payment on 31 October 2017? (Round to the nearest dollar. )
A)credit to Premium on bonds payable for $1288.
B)debit to Interest expense for $32,188.
C)debit to Interest expense for $29,612.
D)debit to Cash for $30,900.

Question

Quizplus · Accepted Answer

The company issued debentures at a premium (105) which indicates that they received more cash than the face value of the bonds. The premium amount will be amortized over the life of the debentures using the straight-line method.

The first interest payment would be for the six months from 30 April 2017 to 31 October 2017. The total interest payment would be:

$515,000 x 12% x 6/12 = $30,900

To record the first interest payment on 31 October 2017, the following journal entry would be made:

Debit Interest Expense $29,612 ($30,900/10 years x 9/12) 
Debit Premium on Bonds Payable $1,288 ($515,000 x 5%/10 years x 9/12) 
Credit Cash $30,900

The Amazing Widget Company Issues $515,000 of 12%,10-Year Debentures at 105