On January 1,a company issues bonds dated January 1 with a par value of $400,000.The bonds mature in 5 years.The contract rate is 7%,and interest is paid semiannually on June 30 and December 31.The market rate is 8% and the bonds are sold for $383,793.The journal entry to record the second interest payment using the effective interest method of amortization is:
A)Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.
B)Debit Interest Payable $14,000.00; credit Cash $14,000.00.
C)Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
D)Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
E)Debit Interest Expense $15,405.79; credit Discount on Bonds Payable $1,405.79; credit Cash $14,000.00.

Question

Quizplus · Accepted Answer

The interest expense is calculated using the market rate (8%) on the carrying amount of the bonds. The carrying amount after the first interest payment is $385,072.07. The interest expense is $385,072.07 * 4% = $15,405.79. The cash paid is $14,000, so the discount amortized is $15,405.79 - $14,000 = $1,405.79.

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