On January 1, a company issues bonds dated January 1 with a par value of $320,000. 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 6% and the bonds are sold for $333,650. The journal entry to record the first interest payment using the effective interest method of amortization is: (Rounded to the nearest dollar.)

Debit interest expense $10,010, debit premium on bonds payable $1,190, credit cash $11,200.

Explanation:

Given the following :

Par value = $320,000

Bonds payable = $333,650

Market rate = 6% compounded semianually

Contract rate = 7%

Cash credited :

Par value * contract rate = $320,000 * 0.07 * 0.5 = $11,200

Interest Expense :

Bonds payable * market rate * 0.5

$333,650 * 0.06 * 0.5 = $10,009.5 (debit)

= $10,010 ( nearest dollar)

Discount Premium on bonds :

Cash - interest expense

$11200 - $10010 = $1,190

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