The Amazing Widget Company issues $500,000 of 6%, 10-year bonds at 103 on March 31, 2014. The bond pays interest on March 31 and September 30. Assume that the company uses the straight-line method for amortization. The journal entry to record the first interest payment on September 30, 2014 is a:

Question

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The bond pays interest on March 31 and September 30, which means that the company needs to record interest expense for six months (from March 31 to September 30) in the current period.

The total amount of interest to be paid over the life of the bond is ($500,000 × 6% × 10 years) = $300,000.

Since the bonds were issued at a premium (103), the total cash received by the company was ($500,000 × 1.03) = $515,000.

The premium on bonds payable needs to be amortized over the life of the bond using the straight-line method. The amount of premium amortization each period is calculated as follows:

Premium on bonds payable = ($515,000 - $500,000) = $15,000 
Premium amortization per period = ($15,000 ÷ 20 periods) = $750

The interest expense to be recorded each period is the sum of the cash interest paid and the premium amortization for that period. Therefore:

Interest expense = ($500,000 × 6% × 6/12) + $750 = $15,750

The journal entry to record the first interest payment on September 30, 2014 is:

Debit Interest Expense $15,750 
Credit Cash $15,000 
Credit Premium on Bonds Payable $750

Therefore, the correct answer is choice letter C.

The Amazing Widget Company Issues $500,000 of 6%, 10-Year Bonds