On January 1,ABC,Inc.,issued $100,000 of 10%,5year bonds on January 1,2015,for $92,280.Interest is due semiannually.When ABC records the first interest payment,which will be greater the debit to Interest Expense or the credit to Cash?
A) The debit to Interest Expense will be greater because the market rate is greater than the stated interest rate.
B) The debit to Interest Expense will be less because the market rate is greater than the stated interest rate.
C) The debit to Interest Expense will be greater because the market rate is less than the stated interest rate.
D) The debit to Interest Expense will be lower because the market rate is less than the stated interest rate.

Question

Quizplus · Accepted Answer

The bonds were issued at a discount, indicating that the market rate is higher than the stated rate. Therefore, the interest expense (calculated using the market rate) will be greater than the cash interest payment (calculated using the stated rate).