Inuvik Inc.sold a 10-year, $100,000, 6% bond for $86,410 when the market rates were 8%.Interest is paid semi-annually.If Inuvik uses the effective interest rate method, which of the following is the correct entry to record the first interest payment? $$\begin{array} { l r r }
\text { A) Dr Interest expense } & 3,000 \
\quad \text { Cr. Interest payable } & & 3,000 \
\text { B) Dr. Interest expense } & 3,000 & \
\text { Dr. Discount on bond } & 680 & \
\text { Cr. Cash } & & 3,680 \
\text { C) Dr. Interest expense } & 3,456 & \
\quad \text { Cr. Discount on bond } & & 456 \
\text { Cr. Cash } & & { 3,000 } \
\text { D) Dr. Discount on bond } & 3,456 & \
\quad \text { Cr. Cash } & { 3,456 }
\end{array}$$

Question

Inuvik Inc.sold a 10-year, $100,000, 6% bond for $86,410 when the market rates were 8%.Interest is paid semi-annually.If Inuvik uses the effective interest rate method, which of the following is the correct entry to record the first interest payment? $$\begin{array} { l r r } 
\text { A) Dr Interest expense } & 3,000 \
\quad \text { Cr. Interest payable } & & 3,000 \
\text { B) Dr. Interest expense } & 3,000 & \
\text { Dr. Discount on bond } & 680 & \
\text { Cr. Cash } & & 3,680 \
\text { C) Dr. Interest expense } & 3,456 & \
\quad \text { Cr. Discount on bond } & & 456 \
\text { Cr. Cash } & & { 3,000 } \
\text { D) Dr. Discount on bond } & 3,456 & \
\quad \text { Cr. Cash } &  { 3,456 }
\end{array}$$

Quizplus · Accepted Answer

The effective interest rate method involves calculating interest expense based on the carrying amount of the bond and the market interest rate at issuance. The bond was issued at a discount ($86,410 for a $100,000 bond), and the market rate is 8% per annum, with interest paid semi-annually. Therefore, the first interest expense is calculated as $86,410 (carrying amount) * 4% (half of the 8% annual market rate) = $3,456. This includes the $3,000 cash payment (half of the 6% coupon rate on the $100,000 face value) and an additional $456 to amortize the discount on the bond. Thus, the correct entry is to debit Interest Expense for $3,456, credit Discount on Bond for $456 to reduce the discount, and credit Cash for $3,000 for the actual cash paid out.

Inuvik Inc A)Option a B)Option B C)Option C D)Option D

Inuvik Inc A)Option a
B)Option B
C)Option C
D)Option D