On January 1, Cleopatra Corporation issued $3,000,000, 14%, 5-year bonds with interest payable on December 31. The bonds sold for $3,216,288. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Bond Interest Expense is for

Question

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To calculate interest expense using the effective-interest method, we first need to calculate the bond's carrying value, which is the present value of all future cash flows related to the bond.

Carrying value on January 1: $3,216,288 (selling price)
- PV of interest payments ($420,000 annuity for 5 years at 12% interest): $1,731,721
- PV of principal payment ($3,000,000 at 12% interest for 5 years): $1,183,612

Carrying value on January 1, net of all costs: $301,955

For the first interest payment, we need to calculate interest expense based on the carrying value as of the beginning of the period. Since the market rate of interest is 12%, which is the same as the coupon rate, the carrying value will remain the same over the first interest period.

Bond interest expense for the first interest payment: $301,955 x 0.12 = $36,235

Therefore, the answer is C) $385,955.

On January 1, Cleopatra Corporation Issued $3,000,000, 14%, 5-Year Bonds