On January 1,2015,Finch Company issued $72,000 of 5-year bonds with a stated rate of 8%.The market rate at time of issue was 12%,so the bonds were discounted and sold for $61,401.Finch uses the effective-interest method of amortization for bond discount.Semiannual interest payments are made on June 30 and December 31 of each year.Which of the following is the correct journal entry to record the first interest payment? (Round all amounts to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

The semiannual interest payment on bonds = (Stated rate/2) x Face value
= (8%/2) x $72,000
= $2,880

To calculate the bond interest expense and amortization of bond discount, we need to use the effective-interest method with the following formula:

Interest expense = Bond carrying value x Market interest rate/2

Bond carrying value = Face value of bonds – Unamortized bond discount

Unamortized bond discount = Bond issue price – Total bond interest payments
= $61,401 - ($2,880 x 2)
= $55,641

Market interest rate = 12%/2 = 6%

Therefore, the interest expense for the first payment on June 30, 2015, would be:

Interest expense = $55,641 x 6% = $3,338

The journal entry to record the first interest payment and bond amortization would be:

June 30, 2015:
Interest payable                   $2,880
Bond interest expense         $3,338
Discount on bonds payable $458
  Cash                                    $2,880

The discount on bonds payable account will increase by $458, which is the difference between the interest expense and the interest payment.

On January 1,2015,Finch Company Issued $72,000 of 5-Year Bonds with a Stated