Question

Pretzelmania, Inc., issues 7%, 10-year bonds with a face amount of $70,000 for $70,000 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 7%. Interest is paid semiannually on June 30 and December 31.

Required:
Record the bond issue and first interest payment on June 30, 2021.

Answer 1

Answer:

The bond issue and first interest payment on June 30, 2021 journal entries would be as follows:

January 1, 2021      

                               Debit            Credit

Cash                      $70,000

Bond payable                           $70,000

June 30, 2021      

                               Debit            Credit

Interest Expense    $2,450

Cash                                          $2,450

Explanation

The journal entry for the bond issue would be the following:

January 1, 2021      

                               Debit            Credit

Cash                      $70,000

Bond payable                           $70,000

In order to prepare the journal entry for first interest payment on June 30, 2021 we would have to calculate the interest expense as follows:

interest expense=face value of bonds*interest rate* (6 months/12 months)

interest expense=$70,000*7%* (6 months/12 months)

interest expense=$4,900*(6 months/12 months)

interest expense=$2,450

Therefore, the journal entry for first interest payment on June 30, 2021 would be as follows:

June 30, 2021      

                               Debit            Credit

Interest Expense    $2,450

Cash                                          $2,450