Final answer:
The journal entry for Saturn Corporation's bond interest expense on June 30, using the effective interest rate method, will show an interest expense based on the effective rate at issuance (6%) and amortization of the bond premium.
Step-by-step explanation:
The subject of the student's question is bond accounting and the clue is in the terms 'interest expense', 'stated rate', and 'effective rate'. The question relates to the treatment of bond premium and the calculation of interest expense using the effective interest method. Now, let's move on to the specific scenario provided where Saturn Corporation issues a bond at a premium (since the issue price is above the face value). Since the bond was issued at an effective rate of 6%, even though the stated rate is 8%, the interest expense recognized on the income statement will be based on the market rate at issuance, which is 6%.
On June 30, the interest expense will be calculated using the carrying amount of the bond. The carrying amount is initially the issued price which is $107,020, and the interest expense for the first six months will be 6% of $107,020 divided by 2 (since interest is calculated semi-annually), which equals $3,210.60. However, the actual cash paid for interest based on the stated rate will be 8% of the face value of $100,000 divided by 2, totaling $4,000. The difference between the cash paid and the interest expense, which is $789.40 ($4,000 - $3,210.60), is the amount of bond premium amortized over the period. The entry will therefore decrease bond premium and increase interest expense by this amortized amount.