Final answer:
The company will record a debit to interest expense of $28,733, not $31,267, based on the effective-interest method and will also record a debit to premium on bonds payable for $1,267, not a credit to cash for $28,733.
Step-by-step explanation:
The student's question deals with how to record the year-end bond transactions for Whirlie Inc. using the effective-interest method of amortization. When the market interest rate at the time of bond issuance is lower than the stated rate, a premium on bonds payable arises. Answering this involves calculating interest expense based on the market rate of interest and the carrying amount of the bond.
To find the interest expense, multiply the carrying amount at the beginning of the period by the market interest rate. The carrying amount is the issued price of the bond, which is $319,251, and the market rate is 9%. Hence, the interest expense for the year is $319,251 x 9% = $28,733.
As the bond pays out 10% on its face value of $300,000, the cash paid is $300,000 x 10% = $30,000. Since the interest expense of $28,733 is less than the cash paid, the difference of $1,267 ($30,000 - $28,733) is amortized from the premium. Therefore, the journal entries at the end of the year will include a debit to interest expense for $28,733, a credit to cash for $30,000, and a debit to the premium on bonds payable for $1,267.