On July 1, 2013, Cargo Corporation issues $4,000,000 of 10-year bonds dated July 1, 2013, at 100 1/2 when the market rate of interest was 8%. Cargo 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, 2013, will include a:

Question

Quizplus · Accepted Answer

Under the effective-interest method of amortization, the interest expense recognized each period is calculated by multiplying the carrying value of the bond by the effective interest rate.

Carrying value at issuance = $4,020,000 ($4,000,000 x 100.5%) 
Effective interest rate = 8% / 2 = 4% (semi-annual payments) 
Interest expense for the period = $4,020,000 x 4% = $160,800

Since interest is paid semi-annually and the first payment is on December 31, 2013, the entry would be:

Debit Interest Expense for $160,800 
Credit Interest Payable for $160,000 
Credit Premium on Bonds Payable for $800 (plug)

Therefore, the correct answer is C.

On July 1, 2013, Cargo Corporation Issues $4,000,000 of 10-Year