Question

On January 1, a company issues bonds dated January 1 with a par value of $310,000. The bonds mature in 5 years. The contract rate is 11%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $321,964. The journal entry to record the first interest payment using the effective interest method of amortization is:

Answer 1

The journal entry for the interest payment is shown below:

Step-by-step explanation:

Interest Expense A/c........................Dr $16,098

Premium on bonds payable A/c....Dr $952

To Cash A/c............................Cr $17,050

Working Note:

Interest expense = Bonds sale value × Market rate

= $321,964 × 5%

= $16,098

The market rate will be:

= 10 / 2

= 5%

Because it is paid semiannually, so rate is divided by 2.

Cash = Par value × Contract rate

= $310,000 × 5.5%

= $17,050

The contract rate will be:

= 11 / 2

= 5.5%

Because it is paid semiannually, so rate is divided by 2.