Question

On January​ 1, 2019, Castle Services issued $ 174 comma 000 of sixminus ​year, 12 ​% bonds when the market interest rate was 11 ​%. The bonds were issued for $ 180 comma 000 . Castle uses the effectiveminus interest method to amortize the bond premium. Semiannual interest payments are made on June 30 and December 31 of each year. Write down the correct journal entry to record the first interest​ payment? (Round your answers to the nearest dollar​ number.)

Answer 1

Answer: Debit: Interest expense $9900

Debit: Premium on bonds payable $540

Credit: Cash $10440

Explanation:

First and foremost, the cash payment will be calculated as:

= $174,000 × 12% × 6/12

= $174,000 × 0.12 × 0.5

= $10440

Interest expenses will be calculated as:

= $180000 × 11% × 6/12

= $180000 × 0.11 × 0.5

= $9900

Therefore, the journal entry to record the first interest​ payment would be:

Debit: Interest expense $9900

Debit: Premium on bonds payable $540

Credit: Cash $10440