On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177.
- The journal entry to record the first interest payment using straight-line amortization is:
A) Debit Bond Interest Expense $12,282.30; debit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.
B) Debit Bond Interest Expense $14,717.70; credit Discount on Bonds Payable $1,217.70; credit Cash $13,500.00.
C) Debit Bond Interest Expense $14,717.70; credit Premium on Bonds Payable $1,217.70; credit Cash $13,500.00.
D) Debit Bond Interest Expense $12,282.30; debit Discount on Bonds Payable $1,217.70; credit Cash $13,500.00.
E) Debit Interest Payable $13,500; credit Cash $13,500.00.

Question

Quizplus · Accepted Answer

To calculate the bond interest expense using straight-line amortization, we first need to determine the total premium on the bonds. The premium on the bonds is the difference between the selling price ($312,177) and the par value ($300,000), which is $12,177. 
Since the bonds pay semi-annual interest, the bond interest expense for the first payment will be calculated as follows:
Bond interest expense = (par value of bonds x contract rate) / 2
= ($300,000 x 0.09) / 2
= $13,500
The amount of premium to be amortized for the first interest payment is calculated as follows:
Premium amortization = total premium / number of interest periods
= $12,177 / 10 (5 years x 2 semi-annual payments)
= $1,217.70
Therefore, the journal entry to record the first interest payment using straight-line amortization would be:
Debit Bond Interest Expense $12,282.30 ($13,500 - $1,217.70)
Debit Premium on Bonds Payable $1,217.70
Credit Cash $13,500.00

On January 1, a Company Issues Bonds Dated January 1