A ten-year bond has a face value of $10,000,a face interest rate of 11 percent,an unamortized bond premium of $400,and an effective interest rate of 10 percent.The bonds were issued on one of the semi-annual interest payment dates.The entry to record the bond interest expense on the first semi-annual interest payment date is: (assuming the effective interest method of amortization),
A) Bond Interest Expense 520
Unamortized Bond Premium 30
Cash 550
B) Bond Interest Expense 520
Cash 520
C) Bond Interest Expense 550
Cash 550
D) Unamortized Bond Premium 520
Cash 520

Question

Quizplus · Accepted Answer

Under the effective interest method of amortization, the bond premium of $400 will be amortized over the life of the bond. The semi-annual interest payment will be calculated as 11% of the face value of $10,000, which is $1,100. However, the bond premium of $400 will reduce the effective interest rate to 10%, resulting in an interest expense of $1,000 for the period. To record this, the entry will be: 
Bond Interest Expense: $1,000 x 0.5 = $500 (for the first six months) 
Unamortized Bond Premium: $400/20 = $20 (amortization for the first six months) 
Cash: $1,100 - $500 + $20 = $620 (cash paid for the first six months) 
Because the interest expense is a debit and the unamortized bond premium is a credit, the total debit amount will be $520 (=$500 + $20) and the total credit amount will be $550 (=$520 + $30). Therefore, the correct answer is A.

A Ten-Year Bond Has a Face Value of $10,000,a Face