Asked by Allison Mcintee on May 07, 2024
Verified
The entry to record the semiannual payment and amortization of the discount using the straight-line method on a 11%, $500,000, 9-year bond issued at 96 would be to:
A) debit Bond Interest Expense $13,750; credit Cash $13,750.
B) debit Bond Interest Expense $28,056; credit Cash $27,500; credit Discount on Bonds Payable $556.
C) debit Bond Interest Expense $28,611; credit Cash $28,611.
D) debit Bond Interest Expense $28,611; credit Cash $27,500; credit Discount on Bonds Payable $1,111.
Straight-line Method
The straight-line method is a depreciation technique that allocates an equal amount of depreciation expense on a tangible asset over its useful life.
Amortization
The process of spreading out the cost of an intangible asset over its useful life.
Discount on Bonds Payable
The amount by which a bond's selling price is less than its face value or principal amount, typically reflecting market interest rates higher than the bond's coupon rate.
- Compute the actual interest rate for bonds that are issued either below or above their face value.
- Keep account of and understand the monetary transactions involved in the issuing and settling of bonds.
Verified Answer
LS
Larissa SpitzigMay 08, 2024
Final Answer :
D
Explanation :
The correct entry involves recognizing both the cash interest payment and the amortization of the bond discount. The bond was issued at 96, implying a 4% discount on its face value of $500,000, which equals $20,000. Over the 9-year term, this discount is amortized using the straight-line method, resulting in an annual amortization of $2,222 ($20,000 / 9 years). Semiannually, this amounts to $1,111 ($2,222 / 2). The semiannual cash interest payment is 5.5% (half of the 11% annual rate) of $500,000, which equals $27,500. Therefore, the total interest expense recognized is the cash payment plus the amortization of the discount, or $27,500 + $1,111 = $28,611.
Learning Objectives
- Compute the actual interest rate for bonds that are issued either below or above their face value.
- Keep account of and understand the monetary transactions involved in the issuing and settling of bonds.