On January 1,your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 7%.The market interest rate is 5%.The issue price of the bond was $10,866.Your company used the effective-interest method of amortization.At the end of the first year,your company should:
A)debit Interest Expense for $543.30,debit Premium on Bonds Payable for $156.70,and credit Interest Payable for $700.
B)debit Interest Expense for $700,credit Premium on Bonds Payable for $156.70,and credit Interest Payable for $543.30.
C)debit Interest Expense for $700,debit Premium on Bonds Payable for $156.70,and credit Interest Payable for $543.30.
D)debit Interest Expense for $543.30 and credit Interest Payable for $543.30.

Question

Quizplus · Accepted Answer

Interest expense = Carrying value × Market interest rate
= $10,866 × 0.05 = $543.30
Interest Payment = Bonds Payable × Stated Interest Rate
= $10,000 × 0.07 = $700.00
Amortization of premium = Interest payment − Interest expense
= $700.00 − $543.30 = $156.70
The entry includes a debit to Interest Expense for $543.30,a debit to Premium on Bonds Payable for $156.70,and a credit to Cash for $700.

On January 1,your Company Issues a 5-Year Bond with a Face