Question

Assuming the market interest rate on the issue date is 9%, the bonds will issue at $340,000. Record the bond issue on January 1, 2021, and the first two semiannual interest payments on June 30, 2021, and December 31, 2021.

Answer 1

Answer:

Journal entries for the issue of bond:

Dr  Cash             $340,000

Cr Bonds payable                   $340,000

Being issue of bonds to investors

Interest payment on 30 June,2021

Dr Interest expense      $15,300

Cr Cash                                       $15,300

Being payment of interest on bond

Interest payment on 31 December,2021

Dr Interest expense      $15,300

Cr Cash                                       $15,300

Being payment of interest on bond

Explanation:

The bond issue brings a cash inflow of $340,000, an increase in cash which should debited to cash and credited to bonds payable account confirming that an amount of $340,000 is owed to the bondholders.

Assuming the market interest rate of 9% is the same as the coupon interest rate,the semi-annual interest is calculated thus:

9%*$340,000*6/12=$ 15,300.00  

The interest is for six months hence the need to prorate the interest.