Whirlie Inc. issued 00,000 face value, 10% paid annually,...

Whirlie Inc. issued $\$300,000$ face value, 10% paid annually, 10-year bonds for $\$319,251$ when the market of interest was 9%. The company uses the effective-interest method of amortization. At the end of the year, the company will record ________. A. a credit to cash for $\$ 28,733$ B. a debit to interest expense for $\$ 31,267$ C. a debit to Discount on Bonds Payable for $\$ 1,267$ D. a debit to Premium on Bonds Payable for $\$ 1,267$

Whirlie Inc. issued $\$300,000$ face value, 10% paid annually, 10-year bonds for $\$319,251$ when the market of interest was 9%. The company uses the effective-interest method of amortization. At the end of the year, the company will record ________.
A. a credit to cash for $\$ 28,733$
B. a debit to interest expense for $\$ 31,267$
C. a debit to Discount on Bonds Payable for $\$ 1,267$
D. a debit to Premium on Bonds Payable for $\$ 1,267$

Key Concepts

Interest Expense Recognition

Interest expense under the effective interest method is recognized based on the market rate multiplied by the bond's carrying amount. This method ensures that the interest expense reflects the effective cost of borrowing in each period and adjusts the bond's carrying value over time as the premium or discount is amortized.

Effective Interest Method of Amortization

This method is used to allocate the bond premium or discount over the life of the bond. Under this method, interest expense is calculated by multiplying the carrying value of the bond by the market rate at issuance, and the resulting expense is compared with the interest paid using the coupon rate. The difference is then used to adjust the premium or discount balance.

Premium on Bonds Payable

A premium arises when bonds are issued for more than their face value, typically because the coupon rate exceeds the market rate. The premium on bonds payable is recorded as a liability and is amortized over the life of the bond, reducing interest expense in each period relative to the cash interest paid.

Bond Issuance and Pricing

This concept involves understanding how bonds are issued at a price that might differ from their face value. The issue price is derived by discounting the bond’s future cash flows using the market rate of interest. When a bond is issued at a premium or discount, it reflects the difference between the coupon rate and the market interest rate at issuance.

Transcript

00:01 This question says that we're in incorporated issued a face $300 ,000 face value.

00:08 So a face value is $300 ,000 and it is paid 10 year.

00:16 It's paid 10 % annually.

00:19 So if you take 10 % of 300 ,000, obviously you're going to get $30 ,000.

00:28 And this is paid annually.

00:29 And we have a 10 -year bond for 31910 year bond for $319 ,0251 when the market of interest was 9%.

00:49 So we're going to take 9 % of 319 ,000.

00:54 And when you work this out, it gives you $28 ,733.

01:06 The question also says, the company uses effective interest method of amortization.

01:16 At the end of the year, the company will record dash.

01:21 The options are credit to cash for an amount, debit to interest expense, debit to discount on bond payable, or debit to premium on bonds payable.

01:33 So from what we have, we have a phase value, and then we have a 10 % of it, a 10 -year bond, and 9 % of that.

01:41 Going to do the map obviously so at the end of the firm the firm at the end of the year rather the firm must enter the interest expense accounts so this is what it should look like because we have an interest expense and we had 9 % of that so we're going to say the table should look like on the first line will be interest expense and this is a debit remember and we had 9 % of 3d9 on 19 ,251.

02:19 So this is going to go under debit...

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