Question

On January 1, a company issues bonds dated January 1 with a par value of $600,000. The bonds mature in 3 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The bonds are sold for $564,000. The journal entry to record the first interest payment using straight-line amortization is:
A) Debit Interest Expense $15,000; debit Discount on Bonds Payable $6,000; credit Cash $21,000.
B) Debit Interest Expense $21,000; credit Cash $21,000.
C) Debit Interest Payable $21,000; credit Cash $21,000.
D) Debit Interest Expense $21,000; credit Premium on Bonds Payable $6,000; credit Cash $15,000.
E) Debit Interest Expense $27,000; credit Discount on Bonds Payable $6,000; credit Cash $21,000.

Answer 1

Answer:

E) Debit Interest Expense $27,000; credit Discount on Bonds Payable $6,000; credit Cash $21,000.

Explanation:

face value 600,000

cash proceeds 564,000

Discount 36,000

total payment: 3 year 2 payment a year = 6

36,000 / 6 = 6,000 amortization per year

cash proceed per payment 600,000 x 0.07/2 = 21,000

6,000 amortization

interest expense 27,000