1 On January 1 a company issues bonds dated January 1 with a

1/ On January 1, a company issues bonds dated January 1 with a par value of $390,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 10% and the bonds are sold for $374,937. The journal entry to record the first interest payment using straight-line amortization is:

Multiple Choice

Debit Interest Payable $17,550.00; credit Cash $17,550.00.

Debit Interest Expense $17,550.00; credit Cash $17,550.00.

Debit Interest Expense $19,056.30; credit Discount on Bonds Payable $1,506.30; credit Cash $17,550.00.

Debit Interest Expense $16,043.70; debit Discount on Bonds Payable $1,506.30; credit Cash $17,550.00.

Debit Interest Expense $19,056.30; credit Premium on Bonds Payable $1,506.30; credit Cash $17,550.00.

2/ On January 1 of Year 1, Congo Express Airways issued $4,300,000 of 7%, bonds that pay interest semiannually on January 1 and July 1. The bond issue price is $3,936,000 and the market rate of interest for similar bonds is 8%. The bond premium or discount is being amortized using the straight-line method at a rate of $14,000 every 6 months. The life of these bonds is:

Multiple Choice

28 years

26 years.

31 years.

9 years.

13 years.

Solution

1 Debit Interest Expense $19,056.30; credit Discount on Bonds Payable $1,506.30(390000-374937)/10; credit Cash $17,550.00(390000*9%/2) 2 Discount on bonds = 4300000-3936000= 364000 Life of bonds = 364000/14000/2= 13 years