Cramer Corp. issued $20,000,000 of 5-year, 9% bonds at a market (effective) interest rate of 10%, receiving cash of $19,227.757. Interest on the bonds is payable semiannually. What is the entry to record the first semiannual interest payment, and the amortization of the bond discount, using the interest method?

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The correct entry involves recognizing interest expense at the market rate (10% of the carrying amount of the bond), reducing this expense by the amortization of the discount to get the cash paid for interest (which is based on the bond's stated rate of 9% of the face value), and reducing the discount on bonds payable by the amount of amortization. The carrying amount of the bond initially is $19,227,757, and 10% of this per annum (5% semiannually) equals $961,388 as interest expense. The cash paid for interest is based on the face value ($20,000,000 * 9% / 2 = $900,000 semiannually), and the difference between the interest expense and the cash paid is the amortization of the discount.

Cramer Corp Interest Expense 900,000 Premium on Bonds Payable 61,388 Cash 961,388\begin{array}{lr}\text { Interest Expense } & 900,000 \\\text { Premium on Bonds Payable } & 61,388\\\text { Cash }&961,388\end{array} Interest Expense Premium on Bonds Payable Cash ​900,00061,388961,388​

Cramer Corp $\begin{array}{lr}\text { Interest Expense } & 900,000 \\\text { Premium on Bonds Payable } & 61,388\\\text { Cash }&961,388\end{array}$