Table 15-1
Nickle Industries needs to raise capital for expansion purposes. Management is considering issuing $1,000,000 of 7.5%, 20-year bonds dated June 1, 2017 with interest payment dates of December 1
and June 1. Nickle's year end is December 31.
-Refer to Table 15-1. Assuming the bonds were issued on June 1,2017,at 97.5,and the company uses the straight-line method of amortization,the adjusting entry on December 31,2017,to accrue the interest and record applicable amortization would include a:

Question

Quizplus · Accepted Answer

The interest payment for the period of June 1, 2017, to December 31, 2017, is 7.5%/2 x $1,000,000 = $37,500. Since the bonds were issued at a discount of 2.5% (97.5% of $1,000,000 = $975,000), the annual amortization is ($1,000,000 - $975,000)/20 years = $1,250. The semi-annual amortization is $1,250/2 = $625.

The adjusting entry on December 31, 2017, would be:

Interest Expense                   $6,354
    Discount on Bonds Payable    $625
    Cash                                   $5,729

Therefore, the correct answer is B, debit to Interest Expense for $6,354.

Table 15-1 Nickle Industries Needs to Raise Capital for Expansion Purposes. Management