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6 May, 13:42

On January 1, a company issued and sold a $408,000, 9%, 10-year bond payable, and received proceeds of $403,000. Interest is payable each June 30 and December 31. The company uses the straight-line method to amortize the discount. The journal entry to record the first interest payment is:

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  1. 6 May, 17:07
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    Answer and Explanation:

    The Journal entry is shown below:-

    Bond interest expense Dr, $18,610

    To Cash $18360

    To Discount on bonds $250

    (Being first interest payment is recorded)

    For recording the first interest payment we simply debited the bond interest expenses as it increased the expenses and we credited cash and discount on bonds as it reduced the assets and the discount should be credited

    Working Note

    Total discount on bonds issued = Sold bonds - Received proceeds

    = $408,000 - $403,000

    = $5,000

    Amortization of Semi Annual Discount = Total discount on bonds issued : Number of periods

    = $5,000 : 20

    = $250

    Cash interest paid = Sold bonds * Interest rate * From Jan to June : Total number of months in a year

    = $408,000 * 9% * 6 : 12

    = $18,360

    Total Interest expense = Cash interest paid + Amortization of Semi Annual Discount

    = $18,360 + $250

    = $18,610
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