Question

On January 1, Pacer Corporation issued $2000000, 13%, 5-year bonds with interest payable on January 1. The bonds sold for $2197080. The market rate of interest for these bonds was 11%. On December 31, using the effective-interest method, the debit entry to Interest Expense is for:
(A) $220000.
(B) $285620.
(C) $260000.
(D) $241679.

Answer 1

Answer:

The correct option is D

Explanation:

Interest expense is to be computed on the bond selling amount or value. So,

The amount of interest expense would be:

Interest expense = Sold Value of bond × Rate of Interest

                            = $2,197,080 × 11%

                            = $241,679

On December 31, the method of effective interest is used, then the debit entry to the Interest expense amounts to $241,679.