Question

On January 1 of Year 1, Mellie Company issued a $20,000, 13% 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 January 1 of Year 2 would include a

		A. Credit to Interest Expense of $2,600
		B. Credit to Interest Payable of $2,600
		C. Debit to Interest Revenue of $2,600
		D. no entry is necessary
		E. Credit to Cash of $2,600
		F. Debit to Interest Receivable of $2,600
		G. Debit to Cash of $2,600

Answer 1

As the bonds are issued at face value, there is no amortization of bond discount or bond premium. Journal Entry on Dec. 31 of Year 1 will be;

Date	Accounts Title and Explanation	Debit	Credit
Year 1
Dec-31	Interest Expense ($20,000 * 13%)	2600
	Interest Payable		2600
	(To record accrued interest)

Journal Entry on Jan 1 of Year 2 will be;

Date	Accounts Title and Explanation	Debit	Credit
Year 2
Jan. 1,	Interest Payable	2600
	Cash		2600
	(To record payment of accrued interest)

So, Option E; Credit to Cash of $2,600 is correct.