Question

On August 1, 2010, a company issues bonds with a par value of $600,000. The bonds mature in 10 years and pay 6% annual interest, payable each February 1 and August 1. The bonds sold at $592,000. The company uses the straight-line method of amortizing bond discounts. The company's year-end is December 31.

Prepare the general journal entry to record the interest accrued at December 31, 2010.

Answer 1

Answer:

Journal entry for accrued interest at December 31:

Date	Accounts	Debit	Credit
Dec 31	Interest Expense	15333
	Interest Payable		15000
	Discount on Bond Payable		333

Explanation:

Par value of Bond = $600000

Interest payable = ($600000*6%)*5/12

= $15000

Amortization expense = Par value of Bond - Issued price of bond

= $600000 - $592000

= $8000

Amortization expense up to December 31 = ($8000 / 10)*5/12 = $333

Interest Expense = Interest payable + Amortization expense

= $15000 + $333

= $15333.