Question

On January 1, your company issues a 5-year bond with a face value of $10,000 and a stated interest rate of 9%. The market interest rate is 7%. The issue price of the bond was $10,886. Your company used the effective-interest method of amortization. At the end of the first year, your company should:

debit Interest Expense for $900, credit Premium on Bonds Payable for $138, and credit Interest Payable for $762.

debit Interest Expense for $762, debit Premium on Bonds Payable for $138, and credit Cash for $900.

debit Interest Expense for $900, debit Premium on Bonds Payable for $138, and credit Interest Payable for $762.

debit Interest Expense for $762 and credit Interest Payable for $762.