Final answer:
To record the first interest payment based on the effective-interest method of amortization for Jazz Corporation's bonds, a b) debit to Interest Expense for $142,400 would be included, reflecting the market rate applied to the carrying amount of the bond. No correct answer for the credit entry is provided in the given options, but the process to calculate the credit entry to Discount on Bonds Payable is explained.
Step-by-step explanation:
To answer the question about the Jazz Corporation's bonds and the recording of the first semi-annual interest payment, one must understand the effective-interest method of amortization.
The corporation issues $4,000,000 of 10-year bonds at 89 (which means at 89% of the face value), and the market interest rate is 8%.
Since interest is paid semi-annually, the first interest payment will reflect half a year's worth of interest.
The cash amount of interest paid is based on the stated (coupon) rate of the bond, which is not given in the question.
However, assuming it is the same as the market rate (8%), the interest payment every six months would be: ($4,000,000 * 0.08) / 2 = $160,000.
This is the amount that would be credited to Interest Payable, eliminating option a).
The entry on December 31, 2016, would also need to include the recognition of interest expense based on the effective market rate applied to the carrying amount of the bond.
The bond was issued at 89, so the carrying amount initially is $4,000,000 * 0.89 = $3,560,000.
The interest expense for the first six months is $3,560,000 * 0.04 (half-year of 8%) = $142,400, confirming option b).
Since the bond was issued at a discount, the payable interest (cash paid) is less than the interest expense recognized (using the market rate), the difference is added to the carrying amount of the bond.
This means the discount on bonds payable is credited, which refutes option c) and d).
The correct journal entry would thus include a debit to Interest Expense for $142,400 and a credit to Discount on Bonds Payable for the difference between the interest expense and the interest paid, which would not be $284,800 (wrong because it's double the interest expense), but rather $142,400 - $160,000 = -$17,600.
However, accounting convention prevents recording negative amounts, so this calculation only serves to confirm the mechanics rather than providing a correct option.