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 103.75 and the company uses the straight-line method of amortization,the adjusting entry on December 31,2017 to accrue interest and record applicable amortization would include a:

Question

Quizplus · Accepted Answer

CThe correct answers are B) credit to Interest Payable for $6,250 and C) debit to Interest Expense for $6,250. Interest for 6 months on a $1,000,000 bond at 7.5% annual interest rate is $1,000,000 * 7.5% * (6/12) = $37,500. However, since the bonds were issued at 103.75, there is a premium of $37,500 ($1,000,000 * 3.75%). The straight-line amortization of this premium over 20 years (the life of the bond) is $37,500 / 20 = $1,875 annually, or $937.50 every six months. Therefore, the actual interest expense recognized is $37,500 - $937.50 = $36,562.50. However, the question specifically asks about the adjusting entry to accrue interest and record applicable amortization, not the calculation of the adjusted interest expense. The correct adjusting entry to accrue the semi-annual interest payment is to credit Interest Payable for the full amount of the interest payment due ($37,500), and debit Interest Expense for the same amount. The amortization of the premium is not directly addressed in the options provided, making B and C the correct choices based on the information requested.

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