Question

A corporation issues $100,000, 8%, 5-year bonds on January 1, 2007, for $104,200. 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. $7,160.
b. $8,000.
c. $8,840.
d. $840.

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Answer 2

Option (a) is correct.

Step-by-step explanation:

Yearly amortization of the bond discount:

= (Amount of bonds issued - Issued for)

= (100,000 - $104,200) ÷ 5

= -$840

Adding this to the cash payment of interest:

= $100,000 × 8%

= $8,000

We get,

= Interest payment + Yearly amortization of the bond premium

= $8,000 + (-$840)

= $7,160

It is the amount of bond interest expense to be recognized in December 31, 2007.