On January 1, a company issued and sold a $400,000, 7%, 10-year bond payable, and received proceeds of $396,000. 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:
A) Debit Bond Interest Expense $14,000; credit Cash $14,000.
B) Debit Bond Interest Expense $28,000; credit Cash $28,000.
C) Debit Bond Interest Expense $14,000; debit Discount on Bonds Payable $200; credit Cash $14,200.
D) Debit Bond Interest Expense $13,800; debit Discount on Bonds Payable $200; credit Cash $14,000.
E) Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds Payable $200.
E) Debit Bond Interest Expense $14,200; credit Cash $14,000; credit Discount on Bonds Payable $200.
Explanation: Cash = $400,000 * .07 * ½ = $14,000
Discount amortized = ($400,000 - $396,000)/20 = $200
Interest expense = $14,000 + $200 = $14,200
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