Question

On July 1, 2016, Cargo Corporation issues $4,000,000 of 10-year bonds dated July 1, 2016, at 100 1/2 when the market rate of interest was 8%. Cargo Corporation uses the effective-interest method of amortization. Interest is paid each June 30 and December 31. The entry to record the first semi-annual interest payment on December 31, 2016, will include a:

a) debit to Interest Expense for $160,800
b) credit to Premium on Bonds Payable for $320,000
c) debit to Premium on Bonds Payable for $321,600
d) credit to Interest Payable for $160,000

Answer 1

The entry to record the first semi-annual interest payment on December 31, 2016, will include a debit to Interest Expense for $160,800.

Step-by-step explanation:

The entry to record the first semi-annual interest payment on December 31, 2016, will include a debit to Interest Expense for $160,800 (Option a).

This is because interest expense is recognized on the effective-interest method of amortization, which means that the interest expense is based on the carrying value of the bonds and the market interest rate.

In this case, the carrying value of the bonds is $4,020,000. To calculate the interest expense, we multiply the carrying value by the market interest rate (8%) and divide by two since it's a semi-annual payment: $4,020,000 * 8% / 2 = $160,800.