On January 1, 2016, Tonika Company issued a four-year, $10,000, 7% bond. The interest is payable annually each December 31. The issue price was $9,668 based on an 8% effective interest rate. Tonika uses the effective-interest amortization method. Rounding calculations to the nearest whole dollar, which of the following journal entries correctly records the 2016 interest expense?

Question

Quizplus · Accepted Answer

The interest expense for the first year can be calculated using the effective interest rate method as follows:
Interest expense = Carrying value of the bond x Effective interest rate
= $9,668 x 8% = $773.44
The carrying value of the bond at the end of the year can be calculated as:
Carrying value of the bond = Issue price - Accumulated amortization
= $9,668 - $332 = $9,336
Therefore, the journal entry to record the interest expense for the first year would be:
Dr. Interest expense $773
Cr. Discount on bonds payable $332
Cr. Cash $441

On January 1, 2016, Tonika Company Issued a Four-Year, $10,000