On January 1, a company issues bonds dated January 1 with a par value of $600,000. The bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31.
-The bonds are sold for $564,000. The journal entry to record the first interest payment using straight-line amortization is:
A) Debit Interest Expense $27,000; credit Discount on Bonds Payable $6,000; credit Cash $21,000.
B) Debit Interest Expense $21,000; credit Premium on Bonds Payable $6,000; credit Cash $15,000.
C) Debit Interest Expense $21,000; credit Cash $21,000.
D) Debit Interest Expense $15,000; debit Discount on Bonds Payable $6,000; credit Cash $21,000.
E) Debit Interest Payable $21,000; credit Cash $21,000.

Question

On January 1, a company issues bonds dated January 1 with a par value of $600,000. The bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. 
-The bonds are sold for $564,000. The journal entry to record the first interest payment using straight-line amortization is:
A) Debit Interest Expense $27,000; credit Discount on Bonds Payable $6,000; credit Cash $21,000.
B) Debit Interest Expense $21,000; credit Premium on Bonds Payable $6,000; credit Cash $15,000.
C) Debit Interest Expense $21,000; credit Cash $21,000.
D) Debit Interest Expense $15,000; debit Discount on Bonds Payable $6,000; credit Cash $21,000.
E) Debit Interest Payable $21,000; credit Cash $21,000.

Quizplus · Accepted Answer

The company issued bonds at a discount, meaning the market interest rate is higher than the contract rate. In order to record the first interest payment using straight-line amortization, the discount on bonds payable should be amortized evenly over the life of the bond.

The annual interest payment on $600,000 at 7% is $42,000 ($600,000 x 7%). Since interest is paid semiannually, the interest payment for each period is $21,000 ($42,000 ÷ 2).

Using straight-line amortization, the discount on bonds payable should be amortized at a rate of $2,000 per period ($36,000 discount ÷ 18 periods). Therefore, the journal entry to record the first interest payment would be:
Debit Interest Expense: $21,000
Credit Discount on Bonds Payable: $2,000 ($36,000 ÷ 18 periods)
Credit Cash: $21,000

On January 1, a Company Issues Bonds Dated January 1