Question

On January 1, a company issued and sold a $399,000, 9%, 10-year bond payable, and received proceeds of $394,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

Answer 1

The journal entry to record the first interest payment for the bond is as follows: Debit Interest Expense for $17,955, credit Discount on Bonds Payable for $5,955, and credit Cash for $12,000.

Step-by-step explanation:

The journal entry to record the first interest payment for the bond would be:

Debit Interest Expense for $17,955 ([$399,000 x 9%]/2)

Credit Discount on Bonds Payable for $5,955 ([$399,000 - $394,000] - $1,000)

Credit Cash for $12,000 ([$399,000 x 9%]/2)

The first step is to calculate the interest expense which can be obtained by multiplying the bond's face value ($399,000) by the interest rate (9%) and dividing it by 2 because the bond pays semi-annual interest.

So, the interest expense is $17,955.

The discount on bonds payable is calculated as the difference between the bond's face value and the proceeds received ($399,000 - $394,000 - $1,000 (discount amortized over 10 years)).

Hence, the discount on bonds payable is $5,955.

Finally, cash is credited with the interest payment of $12,000 ([$399,000 x 9%]/2).