Burns Company issued $1,000,000 of 9 percent, ten-year bonds for $937,790 on July 1, 2017, when the market rate of interest was 10 percent. The bonds mature in ten years and pay interest on June 30 and December 31. Burn's fiscal year ends on December 31 and the company uses the effective interest method of amortization. The journal entry on December 31, 2017 will include:

Question

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The interest expense is calculated using the effective interest rate method. The interest expense for the period is $937,790 (carrying amount) * 10% (market rate) / 2 = $46,889.50. The cash interest paid is $1,000,000 * 9% / 2 = $45,000. The difference of $1,889.50 is credited to Discount on Bonds Payable.

Burns Company Issued $1,000,000 of 9 Percent, Ten-Year Bonds for $937,790