Question

question 14 (5 points) on january 1, $400,000 of 12%, 10 - year bonds were sold for $380,000. the bonds require semiannual interest payments on june 30 and december 31. the journal entry for the june 30 interest payment is a) debit interest expense $24,000; credit cash, $24,000. b) debit interest expense $25,000; credit discount on bonds payable, $1,000; credit cash, $24,000. c) debit interest expense $23,000; debit discount on bonds payable, $1,000; credit cash, $24,000. d) debit interest expense $25,000; credit cash, $25,000.

Explanation:

Step1: Calculate the face - value interest

The face value of the bonds is $400,000 and the annual interest rate is 12%. For a semi - annual payment, the interest payment based on face value is $400,000\times\frac{12\%}{2} = 24000$.

Step2: Calculate the bond discount

The bonds were sold at a discount. The discount amount is $400,000 - 380,000=20,000$. The bond has a 10 - year life with semi - annual periods, so there are $10\times2 = 20$ periods. The semi - annual amortization of the discount is $\frac{20,000}{20}=1000$.

Step3: Determine the interest expense

The interest expense is the sum of the interest based on face value and the amortization of the discount. So, the interest expense is $24000 + 1000=25000$. The journal entry will debit Interest expense for $25,000$, credit Discount on bonds payable for $1,000$ (to amortize the discount), and credit Cash for $24,000$ (the actual interest payment based on face value).

Answer:

B. debit Interest expense $25,000; credit Discount on bonds payable, $1,000; credit Cash, $24,000