Question

On January 1 of Year 1, Mellie Company issued a $25,000, 12% bond, at face value. Interest is paid annually each January 1, so the first coupon payment was made on January 1 of Year 2. Mellie uses the effective-interest method on its books. The entry related to this bond on December 31 of Year 1 would include which of the following?

	a debit to Interest Receivable of $3,000
	a credit to Interest Expense of $3,000
	a debit to Interest Revenue of $3,000
	a credit to Cash of $3,000
	a credit to Interest Payable of $3,000
	a debit to Cash of $3,000
	No entry is necessary on December 31 of Year 1. Can you explain why?

Answer 1

Correct Option---- credit to Interest Payable of $3,000

Interest is not paid at December 31 so cash will not be credited. Interest Payable Account will be credited to make a liability and Interest expense will be debited to book the interest expense of the year 1. Following journal entry would be made

Date	General Journal	Debit	Credit
31-Dec	Interest Expense	$ 3,000.00
	Interest Payable		$ 3,000.00
	(Interest payable on Bonds)