Blanding Company issues $1,000,000 of 8%, 10-year bonds at 98 on February 28, 2014. The bonds pay interest on February 28 and August 31. Assume that Blanding uses the straight-line method for amortization. The journal entry to record the first interest payment on August 31, 2014 would be a:
A)debit to Cash for $40,000.
B)debit to Interest Expense for $41,000.
C)debit to Interest Expense for $39,000.
D)debit to Discount on Bonds Payable for $1,000.

Question

Quizplus · Accepted Answer

The bonds were issued at 98, meaning they were issued at a discount. The discount is $20,000 ($1,000,000 x 2%). Over 10 years, this discount is amortized straight-line, so $1,000 per period (20 periods). The interest expense is the cash interest ($40,000) plus the amortization of the discount ($1,000), totaling $41,000.

Blanding Company Issues $1,000,000 of 8%, 10-Year Bonds at 98