On July 1, 2020, Cargo Corporation issues $4,000,000 of 10-year bonds dated July 1, 2020, at 100 1/2 when the market rate of interest was 8%. Cargo Corporation uses the effective-interest method of amortization. Interest is paid each June 30 and December 31. The entry to record the first
Semi-annual interest payment on December 31, 2020, will include a:

Question

Quizplus · Accepted Answer

The effective-interest method of amortization calculates interest expense based on the carrying value of the bond multiplied by the market rate of interest at the time of issuance.

Step 1: Calculate the amount of interest expense for the first six months:

Carrying value = $4,020,000 (issue price of $4,000,000 + premium of $20,000)
Market rate of interest = 8%
Interest expense = $4,020,000 x 8% x 6/12 = $160,800

Step 2: Record the semi-annual interest payment on December 31, 2020:

Debit Interest Expense for $160,800
Credit Cash for $160,000 (effective interest of 4% x $4,000,000)
Credit Premium on Bonds Payable for $800 (difference between interest expense and interest paid)

Therefore, the answer is B.

On July 1, 2020, Cargo Corporation Issues $4,000,000 of 10-Year