Question

On January 1, a company issues bonds dated January 1 with a par value of $360,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $346,096. The journal entry to record the first interest payment using the effective interest method of amortization is:

Answer 1

Debit Interest Expense $17,304.80; credit discount on bonds payable $1,104.8; credit cash $16,200

Interest Expense A/c......................Dr $17,304.80

Discount on bonds payable A/c....Cr $1104.8

To Cash A/c............................Cr $16,200

Step-by-step explanation:

Given the following :

Bond value = $346,096

Market rate = 10% = 0.1

Contract rate = 9% = 0.09

Par value = $360,000

Note : Semiannual payment = rate / 2

Calculating the cash value and interest expense:

Cash value :

Par value × contract rate

$360,000 × (0.09/2)

$360,000 × 0.045

= $16,200

Interest expense :

Bond value × market rate

$346,096 × (0.1/2)

$346,096 × 0.05

= $17,304.8