On January 1,your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $10,866.At the end of the first year,the company should:
A)debit Interest Expense for $543,debit Premium on Bonds Payable for $157,and credit Interest Payable for $700.
B)debit Interest Expense for $700,credit Premium on Bonds Payable for $157,and credit Interest Payable for $543.
C)debit Interest Expense for $700,debit Premium on Bonds Payable for $157,and credit Interest Payable for $543.
D)debit Interest Expense for $543 and credit Interest Payable for $543.

Question

Quizplus · Accepted Answer

Carrying value of bonds * Mkt interest Rate = Interest Expense $10,866 * 0.05 = $543,30
Bonds payable * Stated Interest Rate = Interest Payable 10,000 * 0.07 = $700.00 Interest Payable - Interest Payable = Amortization of Interest $700.00 - 543.30 = 156.70.

On January 1,your Company Issues a 5-Year Bond with a Face