On January 1, Woodbridge Corporation issued $2,000,000, 14%, 5-year bonds with interest payable on January 1 and July 1. The bonds sold for $2,197,080. The market rate of interest was 12%. Using the effective-interest method, the debit entry to interest expense on July 1 is (round to the nearest dollar):

Question

Quizplus · Accepted Answer

Step 1: Calculate the annual interest payment
= 0.14 x $2,000,000
= $280,000

Step 2: Calculate the present value of the bond at the market interest rate of 12%:
PV = $280,000 x (1 - 1/1.12^10) / 0.12 + $2,000,000 / 1.12^10
= $2,197,080 (given)

Step 3: Calculate the amortization of discount:
Interest expense = Carrying value x Market interest rate
= ($2,197,080 - $2,000,000) x 0.12
= $23,648

Amortization of discount = Interest expense - Annual interest payment
= $23,648 - $280,000 / 2
= -$131,826

Note that the amortization of discount is negative because the bond is issued at a premium.

Step 4: Calculate the debit entry to interest expense on July 1:
= $280,000 / 2 - (-$131,826)
= $153,827 (rounded to nearest dollar = $153,796)

Therefore, the correct answer is D) $131,825.

On January 1, Woodbridge Corporation Issued $2,000,000, 14%, 5-Year Bonds