Question

On January 1, a company issues bonds dated January 1 with a par value of $220,000. 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 8% and the bonds are sold for $228,930. The journal entry to record the first interest payment using the effective interest method of amortization is (Rounded to the nearest dollar.) Multiple Choice Debt Bond Interest Expense 39157, de Premium on Bonds Payable 574), Credit Cash $9.900 Debit Bond Interest Expense 200700 Premium on los Payable 00100 Credit Cash 9.00000 o Debit interest Payable 59.900.00 Credit Cash $9.900.00 ) Detit Bond interest Expense 10793.00, cred Premium on Bonds Payable $893.00, credit Cash $9.900.00 O Debt Bond Interest Expense 5915700, debit Discount on blonds Payable $74300, cred Cash $9.900.00

Answer 1

Answer

• Issue price = $ 228,930
• Par Value = $ 220,000
• This means that Bonds are issued at a PREMIUM of $ 8,930
• Complete entry for first semi annual payment will be

Accounts title	Debit	Credit
Interest Expense ($ 228930 x 8% market rate x 6/12)	$9,157
Premium on Bonds Payable ($ 9900 - 9157)	$743
Cash ($220000 x 9% coupon rate x 6/12)		$9,900

• Correct Answer is therefore Option #1
  Debit Interest Expense $ 9157, Debit Premium $ 743 and Credit Cash $ 9900