On january 1, 2019, electro inc. 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, 2019.

Cash      680,186   debit

discount on BP   59,814 debit

       Bonds payable                  740,000 credit

--to record issuance of the bonds--

interest expense34009.3debit

discount on BP       6259.3 credit

cash                   27750 credit

--to record first payment of the bonds--

Explanation:

procceds                         680,186

face value                         740,000  

discount on bonds payable    59,814

bond rate (semi-annually)7.5% / 2 = 0.0375

market rate (semi-annually)10% / 2  = 0.05

The first payment will be:

cash proceeds: face value x bond rate:

740,000 x 0.0375 = 27,750

interest expense: carrying value x market rate

680,186 x 0.05 = 34,009.3

amortization on discount on BP:

34,009.3 - 27,750 = 6259.3

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