Question

On January 1, a company issues bonds dated January 1 with a par value of $460,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $441,361. The journal entry to record the first interest payment using the effective interest method of amortization is:

Answer 1

The journal entry to record the first interest payment using the effective interest method of amortization is a debit to Interest Expense and a credit to Cash.

Step-by-step explanation:

The journal entry to record the first interest payment using the effective interest method of amortization is as follows:

Debit: Interest Expense - $460,000 x 7% x (6/12) = $16,100

Credit: Cash - $460,000 x 7% x (6/12) = $16,100

The company accrues interest expense based on the carrying value of the bonds, which is the initial issuance price less any discount or plus any premium.

The interest payment is recorded by crediting the cash account and debiting the interest expense account.