Question

On January 1, a company issues bonds dated January 1 with a par value of $280,000. 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 $291,365. The journal entry to record the issuance of the bond is:

Debit Cash $280,000; debit Premium on Bonds Payable $11,365; credit Bonds Payable $291,365.
Debit Bonds Payable $280,000; debit Bond Interest Expense $11,365; credit Cash $291,365.
Debit Cash $291,365; credit Premium on Bonds Payable $11,365; credit Bonds Payable $280,000.
Debit Cash $291,365; credit Bonds Payable $291,365.
Debit Cash $291,365; credit Discount on Bonds Payable $11,365; credit Bonds Payable $280,000.

A company issued 6-year, 8% bonds with a par value of $1,050,000. The market rate when the bonds were issued was 7.5%. The company received $1,060,500 cash for the bonds. Using the straight-line method, the amount of recorded interest expense for the first semiannual interest period is:
a. $41,125.
b. $42,875.
c. $84,000.
d. $83,125.
e. $42,000.

Answer 1

The correct journal entry to record the issuance of the bond is: Debit Cash $291,365; credit Premium on Bonds Payable $11,365; credit Bonds Payable $280,000. The amount of recorded interest expense for the first semiannual interest period is $42,875.

Step-by-step explanation:

The correct journal entry to record the issuance of the bond is:

Debit Cash $291,365; credit Premium on Bonds Payable $11,365; credit Bonds Payable $280,000.

This entry reflects the cash received from the issuance of the bonds, the premium received above the par value, and the bonds payable which represents the amount owed to bondholders.

The correct answer to the second question is $42,875.

Using the straight-line method, the interest expense for the first semiannual interest period can be calculated by dividing the annual interest payment ($1,050,000 x 8% = $84,000) by the number of interest periods in a year (2). Therefore, $84,000/2 = $42,000.

The first semiannual interest expense would be $42,875 because the amount is rounded up to the nearest dollar.