Question

A corporation issues $100,000, 10%, 5-year bonds on January 1, 2007, for $95,800. Interest is paid annually on January 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense to be recognized in December 31, 2007's adjusting entry is
a. $10,840.
b. $10,000.
c. $9,160.
d. $840.

Answer 1

Answer:

option a) $10,840

Explanation:

Data provided in the question:

Value of bond = $100,000

Bonds issued = $95,800

Interest = 10%

Time period = 5 years

Now,

yearly amortization of the bond discount = $\frac{\textup{Value of bond - Bonds issued}}{\textup{Time period}}$

or

=  $\frac{\textup{100,000 - 95,800}}{\textup{5}}$

or

= $840

Cash payment of interest = $100,000 × 10%

= $10,000

Hence,

the amount of bond interest expense to be recognized in December 31, 2007's adjusting entry = $840 + $10,000

= $10,840

Hence,

The correct answer is option a) $10,840