On January 1,2019,Agree Company issued $85,000 of five-year,8% bonds when the market interest rate was 12%.The issue price of the bonds was $62,401.Agree uses the effective-interest method of amortization for bond discount.Semiannual interest payments are made on June 30 and December 31 of each year.Which of the following is the correct journal entry to record the first interest payment? (Round all amounts to the nearest whole dollar.)

Question

Quizplus · Accepted Answer

The correct journal entry is determined by calculating the interest expense using the effective interest method, which involves applying the market interest rate at the time of issuance (12% annually, or 6% semiannually) to the carrying amount of the bonds. The carrying amount initially is the issue price of $62,401. The semiannual interest expense is 6% of $62,401, which equals $3,744 (rounded to the nearest dollar). The cash paid for interest is the bond's stated rate (8% annually, or 4% semiannually) times the face value ($85,000), which equals $3,400. The difference between the interest expense and the cash paid ($3,744 - $3,400 = $344) is the amount by which the discount on the bonds payable is amortized.

On January 1,2019,Agree Company Issued $85,000 of Five-Year,8% Bonds When Interest Expense 5100 Cash 5100\begin{array} { | c | r | r | } \hline \text { Interest Expense } & 5100 & \\\hline \text { Cash } & & 5100 \\\hline\end{array} Interest Expense Cash ​5100​5100​​

On January 1,2019,Agree Company Issued $85,000 of Five-Year,8% Bonds When $\begin{array} { | c | r | r | } \hline \text { Interest Expense } & 5100 & \\\hline \text { Cash } & & 5100 \\\hline\end{array}$