Question

Great Lake Glassware Company issues​ $1,121,000 of its​ 12%, 10-year bonds at 99 on February​ 28, 2018. The bonds pay interest on February 28 and August 31. Assume that Great Lake uses the​ straight-line method for amortization. The journal entry to record the first interest payment on August​ 31, 2018 includes a​ ________. A. debit to Cash for​ $67,260 B. debit to Interest Expense for​ $66,699 C. debit to Discount on Bonds Payable for​ $561 D. debit to Interest Expense for​ $67,821

Answer 1

Answer:

The correct answer is option (D).

Explanation:

According to the scenario, the computation of the given data are as follows:

Total amount = $1,121,000

Bonds percentage = 12%

Bonds year = 10 years

Time period Feb.28 - Aug.31 = 6 months

Total interest expense = Cash payment of interest + Amortization of discount

So, Cash payment of interest = $1,121,000 × 12% × 6÷12

= $67,260

Amortization of discount = ( $1,121,000 × 1÷100) ÷ 20 = $560.5

So, Total interest expense = $67260 + $560.5 = $67,820.5 or $67,821

Hence, The journal entry is shown below.

Aug.31 Interest Expense A/c Dr $67,821

           To Cash A/c $67,260

           To  Amortization of discount A/c $561

             ( Being interest expense is recorded)