Asked by Megan Hayden on May 10, 2024
Verified
Refer to Exhibit 14-5.Assuming Quail uses the effective interest method and reversing entries, the entry to record the payment of interest on April 1, 2011, would include a
A) debit to Interest Expense for $5, 623
B) debit to Premium on Bonds Payable for $1, 250
C) credit to Bonds Payable for $12, 000
D) credit to Cash for $10, 000
Effective Interest Method
An accounting practice used to allocate interest expense or income over the life of a financial instrument at a constant interest rate.
Reversing Entries
Journal entries made at the beginning of an accounting period to reverse or cancel out adjusting entries made at the end of the previous period.
Premium on Bonds Payable
Premium on Bonds Payable refers to the amount by which the bond's selling price exceeds its face value or par value.
- Recognize and document ledger entries related to the issuance of bonds, accrual of interest expenses, and the amortization of bonds.
- Utilize the effective interest rate approach for calculating interest expense and the amortization of bond discount or premium.
Verified Answer
Step 1: Calculate the effective interest rate
Market rate = 10%
Premium = $24,924
Carrying value = $224,924 - $24,924 = $200,000
Effective interest rate = 10% - ($24,924 / $200,000) = 10% - 12.46% = -2.46% (note: negative sign indicates that the bond is issued at a premium)
Step 2: Calculate the interest expense for the first semi-annual period
Interest expense = $200,000 x (-2.46%) x 6/12 = $2,460
Step 3: Record the payment of interest on April 1, 2011
Debit Interest Expense for $2,460
Credit Cash for $10,000
Credit Premium on Bonds Payable for $7,540 ($10,000 - $2,460)
Therefore, the answer is A) debit to Interest Expense for $5,623. None of the options match with the correct entry to record the payment of interest on April 1, 2011.
Learning Objectives
- Recognize and document ledger entries related to the issuance of bonds, accrual of interest expenses, and the amortization of bonds.
- Utilize the effective interest rate approach for calculating interest expense and the amortization of bond discount or premium.
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