On January 1,a company issues bonds dated January 1 with a par value of $600,000.The bonds mature in 3 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The bonds are sold for $564,000.The journal entry to record the first interest payment using straight-line amortization is:
A)Debit Interest Payable $21,000; credit Cash $21,000.
B)Debit Interest Expense $21,000; credit Cash $21,000.
C)Debit Interest Expense $27,000; credit Discount on Bonds Payable $6,000; credit Cash $21,000.
D)Debit Interest Expense $15,000; debit Discount on Bonds Payable $6,000; credit Cash $21,000.
E)Debit Interest Expense $21,000; credit Premium on Bonds Payable $6,000; credit Cash $15,000.

Question

Quizplus · Accepted Answer

The interest expense is calculated as the contract rate (7%) on the par value ($600,000) divided by 2 for semiannual payments, which is $21,000. The discount on bonds payable is amortized straight-line over 6 periods (3 years, semiannual), which is $6,000 per period ($36,000 total discount divided by 6). Therefore, the entry is to debit Interest Expense $27,000 (sum of cash interest and amortization), credit Discount on Bonds Payable $6,000, and credit Cash $21,000.

On January 1,a Company Issues Bonds Dated January 1 with a Par