Exhibit 14-5 Quail issued $200, 000 of its ten-year 12% bonds for $224, 924 on October 1, 2010.The effective rate on the bonds was 10% and interest is paid each October 1 and April 1.
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Refer to Exhibit 14-5.Assuming Quail uses the effective interest method and reversing entries, the entry to record the payment of interest on April 1, 2011, would include a

Question

Quizplus · Accepted Answer

Under the effective interest method, the interest expense is calculated by multiplying the carrying value of the bond by the effective interest rate. The effective interest rate is the market rate at the time of issuance adjusted for any premium or discount.

Step 1: Calculate the effective interest rate
Market rate = 10%
Premium = $24,924
Carrying value = $224,924 - $24,924 = $200,000
Effective interest rate = 10% - ($24,924 / $200,000) = 10% - 12.46% = -2.46% (note: negative sign indicates that the bond is issued at a premium)

Step 2: Calculate the interest expense for the first semi-annual period
Interest expense = $200,000 x (-2.46%) x 6/12 = $2,460

Step 3: Record the payment of interest on April 1, 2011
Debit Interest Expense for $2,460
Credit Cash for $10,000
Credit Premium on Bonds Payable for $7,540 ($10,000 - $2,460)

Therefore, the answer is A) debit to Interest Expense for $5,623. None of the options match with the correct entry to record the payment of interest on April 1, 2011.

Exhibit 14-5 Quail Issued $200, 000 of Its Ten-Year 12