Question

ABC Company issues a bond with a face value of $100,000 on January 1 for $100,000. ABC prepares financial statements only at December 31, so no adjusting entries are made during the year to accrue interest. If the bond carries a stated interest rate of 6% payable in cash on December 31 of each year, the journal entry to record the first bond interest payment includes a ______

a) credit to Interest expense
b) debit to Interest expense
c) debit to Interest payable
d) credit to Cash

Answer 1

b) debit to Interest expense

d) credit to Cash

Step-by-step explanation:

When bonds are issued, it carries a finance cost in the form of interest with it. That the interest is to be duly paid to keep the company solvent.

For this, interest is an expense.

And that the expense thus. it will be debited,

As because of the standard rule of "debit all expenses and losses"

Further it is provided that it is paid in cash and accordingly, this will decrease the cash amount in hand.

Thus, as cash is an asset and that is reduced it will be credited.