Question

Great Lake Glassware Company issues $ 1 comma 197 comma 000 of its 12​%, 10minusyear bonds at 95 on February​ 28, 2018. The bonds pay interest on February 28 and August 31. Assume that Great Lake uses the straightminusline method for amortization. The journal entry to record the first interest payment on August​ 31, 2018 includes a​ ________.

Answer 1

Dr interest expense 74,812.50

Cr Cash 71,820

Cr Discount on bonds payable 2,992.50

Step-by-step explanation:

the cash interest payments = principal x coupon rate x 1/2 (semiannual) =$1,197,000 x 12% x 0.5 = $71,820

since the bonds were sold at a discount, we must add the discount amortization = [($1,197,000 x 5%) / 10 years] x 1/2 = $5,985 x 0.5 = $2,992.50

total interest expense = $71,820 + $2,992.50 = $74,812.50

So the journal entry should be:

Dr interest expense 74,812.50

Cr Cash 71,820

Cr Discount on bonds payable 2,992.50