Answer:
interest expense 38,866.5 debit
discount on bond payable 3,866.5 credit
cash 35,000 credit
Explanation:
The effective method calculates the interest expense considering the carrying value and the market rate. Then, the difference with the coupon payment is amortization of the premium or discount
carrying value (issued price of the bonds) 431,850
market rate: 9%
interest expense: 431,850 x 9% = 38,866.5
coupon payment 500,000 x 7% = 35,000
this is the cash outlay for the bonds
Difference: 38,866.5 - 35,000 = 3,866.5
As the proceeds are lower than face value, this is a discount.
