On January 1, a Company Issues Bonds Dated January 1

question 169

Multiple Choice

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31.
- The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the second interest payment using the effective interest method of amortization is:

• A) Debit Interest Expense $12,648.28; debit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.
• B) Debit Interest Expense $15,405.79; credit Discount on Bonds Payable $1,405.79; credit Cash $14,000.00.
• C) Debit Interest Payable $14,000.00; credit Cash $14,000.00.
• D) Debit Interest Expense $12,648.28; debit Premium on Bonds Payable $1,351.72; credit Cash $14,000.00.
• E) Debit Interest Expense $15,351.72; credit Discount on Bonds Payable $1,351.72; credit Cash $14,000.00.

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Definitions:

Equilibrium Quantity

The volume of products or services on offer equals the volume sought by consumers at the equilibrium price in the market.

Expected Utility

The anticipated satisfaction or value a person expects to receive from a particular outcome, considering all possible outcomes and their probabilities.

Insurance Market

The marketplace where various types of insurance products and services are traded between insurers and those seeking insurance protection.

Probability

A gauge of the probability that an event will ensue, denoted as a figure falling between 0 and 1.