On January 1 Electro Incorporated issued $740,000 of 7.5%, four-year bonds that pay interest semiannually on June 30 and December 31. They are issued at $680,186 and their market rate is 10% at the issue date. After recording the entry for the issuance of the bonds, Bonds Payable had a balance of $740,000 and Discount on Bonds Payable had a balance of $59,814. Electro uses the effective interest bond amortization method. The first semiannual interest payment was made on June 30.

Complete the necessary journal entry for the interest payment date of June 30 by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

To record the journal entry for the first semiannual interest payment on June 30, we will use the effective interest method to amortize the bond discount. Let's first break down the necessary steps.

### Step 1: Calculate semiannual interest expense based on the market rate

The market rate is 10%, but since the payments are semiannual, we use half of that rate (5%).

\[
\text{Interest Expense} = \text{Carrying Value of Bonds} \times \text{Market Rate (semiannual)} 
\]
At issuance, the carrying value of the bonds is $680,186. The semiannual market rate is 5%, so:

\[
\text{Interest Expense} = 680,186 \times 0.05 = 34,009.30
\]

### Step 2: Calculate the cash payment based on the stated rate

The stated interest rate is 7.5%, but since payments are semiannual, we also use half of that rate (3.75%). The face value of the bonds is $740,000.

\[
\text{Cash Payment} = \text{Face Value} \times \text{Stated Rate (semiannual)}
\]

\[
\text{Cash Payment} = 740,000 \times 0.0375 = 27,750
\]

### Step 3: Calculate the amortization of the bond discount

The bond discount amortization is the difference between the interest expense and the cash payment:

\[
\text{Discount Amortization} = \text{Interest Expense} - \text{Cash Payment}
\]

\[
\text{Discount Amortization} = 34,009.30 - 27,750 = 6,259.30
\]

### Step 4: Journal Entry on June 30

1. **Interest Expense** (Debit) = $34,009.30
2. **Discount on Bonds Payable** (Credit) = $6,259.30
3. **Cash** (Credit) = $27,750

### Journal Entry:
| Date         | Account                      | Debit         | Credit        |
|--------------|------------------------------|---------------|---------------|
| June 30      | Interest Expense              | $34,009.30    |               |
|              | Discount on Bonds Payable     |               | $6,259.30     |
|              | Cash                          |               | $27,750       |

This journal entry reflects the interest expense, the amortization of the discount, and the cash payment for the interest.

Would you like further details or have any questions?

Here are 5 related questions:
1. How does the effective interest method differ from the straight-line method of amortizing bond discounts?
2. What is the carrying value of the bonds after the first interest payment?
3. How does bond amortization affect the balance sheet over time?
4. How would the journal entry change if the bonds were issued at a premium instead of a discount?
5. How do changes in market interest rates after bond issuance affect bond prices?

**Tip:** Bond amortization increases the carrying value of bonds issued at a discount, and the carrying value eventually equals the face value at maturity.

On January 1 Electro Incorporated issued $740,000 of 7.5%, four-year bonds that pay interest semiannually on June 30 and December 31. They are issued at $680,186 and their market rate is 10% at the issue date. After recording the entry for the issuance of the bonds, Bonds Payable had a balance of $740,000 and Discount on Bonds Payable had a balance of $59,814. Electro uses the effective interest bond amortization method. The first semiannual interest payment was made on June 30. Complete the necessary journal entry for the interest payment date of June 30 by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Learn how to complete the journal entry for a semiannual interest payment on $740,000 bonds issued at a discount using the effective interest method. This example explains how to calculate the interest expense, cash payment, and bond discount amortization, with a step-by-step breakdown. Suitable for undergraduate finance and accounting students.

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