On January 1, Polk Corporation issued $2,000,000, 14%, 5-year bonds with interest payable on July 1 and January 1. The bonds sold for $2,197,080. 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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First, we need to calculate the annual interest payment for the bonds, which is $280,000 ($2,000,000 x 14%).

Next, we need to calculate the carrying value of the bonds on the first interest date. Using the effective-interest method, we take the initial carrying value of $2,197,080 and add the interest expense for the period, which is calculated as:

Carrying value on Jan 1 = $2,197,080 
Interest expense for first period = $2,197,080 x 12% x (181/365) = $107,255 
Carrying value on July 1 = $2,304,335

Finally, we can calculate the bond interest expense for the period by taking the difference between the carrying value at the beginning and end of the period and adding the interest payment. This is:

Bond interest expense = ($2,304,335 - $2,197,080) + $280,000 
Bond interest expense = $387,255 + $280,000 
Bond interest expense = $667,255

Therefore, the debit entry to Bond Interest Expense is $131,825 ($667,255 x (181/365)).

The correct answer is C) $131,825.

On January 1, Polk Corporation Issued $2,000,000, 14%, 5-Year Bonds