Rowan Corporation issued ten-year term bonds on January 1,2013,with a face value of $400,000.The face interest rate is 8 percent and interest is payable semi-annually on June 30 and December 31.The bonds were issued for $345,480 to yield an effective annual rate of 10 percent.The effective interest method of amortization is to be used.The entry on June 30,2013,to record the payment of interest and amortization of discount will be:

Question

Quizplus · Accepted Answer

The semi-annual interest payment can be calculated as ($400,000 x 8% x 6/12) = $16,000. 
Using the effective interest method, the bond discount of $54,520 ($400,000 - $345,480) will be amortized over the life of the bond. 
For the first period, the amortization of bond discount can be calculated as ($54,520 x 10% x 6/12) = $2,726. 
Therefore, the journal entry on June 30, 2013 would be: 
Bond Interest Expense $17,274 ($16,000 + $1,274) 
Unamortized Bond Discount $1,274 ($2,726 - $1,452) 
Cash $16,000 
Hence, option B is the correct answer.

Rowan Corporation Issued Ten-Year Term Bonds on January 1,2013,with a Face