On January 1, Dade Corporation issued $3,000,000, 7%, 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 6%.On the first interest date, using the effective-interest method, the debit entry to Interest Expense is for

Question

Quizplus · Accepted Answer

Using the effective-interest method, the interest expense is calculated by multiplying the carrying value of the bonds (which will change each period due to amortization of the premium) by the market rate of interest.

Carrying value of bonds at the beginning = $3,216,288 (issue price) 
Interest payment due = $3,000,000 x 7% = $210,000 
Amortization of premium = $216,288/5 years = $43,258.40

Therefore, the carrying value of bonds at the first interest payment date = $3,216,288 - $43,258.40 = $3,173,029.60

Interest expense = $3,173,029.60 x 6% = $190,381.78 
Therefore, the debit entry to Interest Expense is $192,977 ($190,381.78 rounded to the nearest dollar). The correct answer is C.

On January 1, Dade Corporation Issued $3,000,000, 7%, 5-Year Bonds