On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793.
- The journal entry to record the first interest payment using straight-line amortization is:
A) Debit Interest Expense $15,620.70; credit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.
B) Debit Interest Expense $14,000.00; credit Cash $14,000.00.
C) Debit Interest Payable $14,000.00; credit Cash $14,000.00.
D) Debit Interest Expense $15,620.70; credit Premium on Bonds Payable $1,620.70; credit Cash $14,000.00.
E) Debit Interest Expense $12,379.30; debit Discount on Bonds Payable $1,620.70; credit Cash $14,000.00.

Question

Quizplus · Accepted Answer

The company issued the bonds at a discount, with a selling price of $383,793 instead of the par value of $400,000. Therefore, the company needs to reduce the discount on bonds payable account by $1,620.70 every period over the life of the bonds. The total discount to be amortized is $16,206.70 ($400,000 - $383,793). The bonds pay interest semiannually, so the company needs to record half of the interest expense ($14,000 = $400,000 x 7% x 6/12) and half of the amortization of the discount ($1,620.70 / 2 = $810.35) every six months. Using straight-line amortization, the discount amortization is constant every period, which is ($16,206.70 / 10 = $1,620.67). Therefore, the journal entry to record the first interest payment on June 30 is:

Debit Interest Expense $15,620.70;
Credit Discount on Bonds Payable $1,620.70;
Credit Cash $14,000.00.

On January 1, a Company Issues Bonds Dated January 1