On 1 January 2017,Carter Sales issued $23,000 in debentures for $18,700.They were six year debentures with a stated rate of 10% and pay semiannual interest.Carter Sales uses the straight-line method to amortise the Debentures discount.Immediately after issue of the debentures,the ledger balances appeared as follows:

After the first interest payment on 30 June 2017,what will be the balance in the Discount account?
A) Debit of $4658
B) Debit of $3942
C) Debit of $4300
D) Credit of $358

Question

On 1 January 2017,Carter Sales issued $23,000 in debentures for $18,700.They were six year debentures with a stated rate of 10% and pay semiannual interest.Carter Sales uses the straight-line method to amortise the Debentures discount.Immediately after issue of the debentures,the ledger balances appeared as follows:

After the first interest payment on 30 June 2017,what will be the balance in the Discount account?

After the first interest payment on 30 June 2017,what will be the balance in the Discount account?
A) Debit of $4658 
B) Debit of $3942 
C) Debit of $4300 
D) Credit of $358

Quizplus · Accepted Answer

The debentures discount is the difference between the amount received and the face value of the debentures, which in this case is $23,000 - $18,700 = $4,300. The debentures are for six years, and the stated rate is 10%. This means that the annual interest payment is $23,000 x 10% = $2,300, and the semiannual interest payment is $2,300/2 = $1,150.

The straight-line method is used to amortise the debentures discount, which means that an equal amount is amortised in each period. The total debentures discount to be amortised is $4,300, and the total number of semiannual periods is 12 (6 x 2). Therefore, the amount of debentures discount to be amortised in each semiannual period is $4,300/12 = $358.33.

After the first interest payment on 30 June 2017, the balance in the Discount account will be:

Discount account balance = Beginning balance - Amortisation + Discount on semiannual interest payment
Discount account balance = $4,300 - $358.33 + $1,150 - $1,150
Discount account balance = $3,941.67 (rounded to $3,942)

Therefore, the correct answer is B, Debit of $3,942.

On 1 January 2017,Carter Sales Issued $23,000 in Debentures for $18,700.They