On January 1, DJ Company issued 10-year $150,000 bonds with a stated rate of 3.5% for $143,869. The bonds pay interest semiannually on June 30 and December 3 The effective rate for the bonds was 4%. The journal entry on June 30 of Year 1 contains

1. A credit to Interest payable of 150,000 x .035/2.
2. Interest expense of 143,869 x .02.
3. A debit to Discount on bonds payable of (150,000 x .02) (143,869 x .035/2).
4. A credit to Cash for 150,000 x .035.