When calculating interest expense for bonds issued at a discount, the process involves understanding both the cash interest payment and the amortization of the discount. The cash interest payment is determined using the formula:

Cash Interest Payment = Principal × Stated Rate × (1/Number of Periods per Year)

For example, if a bond has a principal of $50,000 and a stated interest rate of 9%, the semiannual cash interest payment would be:

Cash Interest Payment = $50,000 × 0.09 × (1/2) = $2,250

Next, the amortization of the discount is calculated by dividing the total discount by the total number of interest periods. If the total discount is $3,000 and the bond has a term of 5 years with semiannual payments (resulting in 10 total periods), the amortization per period would be:

Amortization = Total Discount / Total Periods = $3,000 / 10 = $300

In the journal entry for recording the interest expense, the cash payment and the amortization of the discount are reflected. The entry would include a debit to interest expense, a credit to cash, and a credit to the discount on bonds payable. The interest expense is calculated as the sum of the cash interest payment and the amortization of the discount:

Interest Expense = Cash Interest Payment + Amortization = $2,250 + $300 = $2,550

The journal entry would look like this:

Debit Interest Expense: $2,550
Credit Cash: $2,250
Credit Discount on Bonds Payable: $300

This entry reflects a decrease in cash and an increase in interest expense, which ultimately reduces equity. The discount on bonds payable is also reduced, which increases the liability closer to the bond's face value. This ensures that the accounting equation remains balanced, as both sides reflect the same total decrease.

Understanding this process is crucial for accurately reporting financial statements and managing bond liabilities effectively. Practicing similar problems will reinforce these concepts and enhance your proficiency in accounting for bonds issued at a discount.

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