On July 1,2016,the Jazz Corporation issues $4,000,000 of 10-year bonds dated July 1,2016,at 89 when the market rate of interest was 8%.Jazz Corporation uses the effective-interest method of amortization.Interest is paid each June 30 and December 31.The entry to record the first semi-annual interest payment on December 31,2016,will include a:

Question

Quizplus · Accepted Answer

The semi-annual interest payment can be calculated as follows:
Face value of bonds * stated interest rate * fraction of year since last payment
= $4,000,000 * 10% * 6/12
= $200,000

Using the effective-interest method, the interest expense for the period will be calculated based on the carrying value of the bonds, which changes as the discount is amortized over the life of the bonds. Since the bonds were issued at a discount, the carrying value will increase over time. Therefore, the entry to record the first semi-annual interest payment on December 31, 2016, will be:

Debit Interest Expense for $142,400 ($4,000,000 * 8% * 6/12)
Credit Cash for $200,000
Credit Discount on Bonds Payable for $57,600 ($200,000 - $142,400)

Therefore, the correct answer is A, debit to Interest Expense for $142,400. Choice B is incorrect because the discount will be credited, not debited. Choice C is incorrect because the bonds were issued at a discount, not a premium. Choice D is incorrect because the interest payable will be credited, not debited.

On July 1,2016,the Jazz Corporation Issues $4,000,000 of 10-Year Bonds