Question

A company issued 8%, 15-year bonds with a par value of $550,000. The current market rate is 8%. The journal entry to record each semiannual interest payment is:______________.

Answer 1

Debit interest expense by $22,000 semiannually

Similarly, Credit Cash by $22,000 semiannually.

Step-by-step explanation:

Every year, following two entries will be made to record the coupon payments made semiannually (Each 6 months)

Date: 30 June

Dr. Interest expense
`550000*(0.08)/(2)*(6 Months)/(12 Months)` $22,000

Cr. Cash $22,000

Date: 31 Dec

Dr. Interest expense
`550000*(0.08)/(2)*(6 Months)/(12 Months)` $22,000

Cr. Cash $22,000

Entries will repeat until the maturity of bond, i.e. 15 years.

Answer 2

Debit Interest Expense $22,000; Credit Cash/Bank $22,000

Step-by-step explanation:

With an interest rate of 8%, and a par value of $550,000

Annual interest rate = 8% * 550,000 = $44,000

Since interest are paid semi-annually, each semi-annual interest is computed as follows:

8% * 550,000 * 0.5 (by dividing the annual interest into 2)

= $22,000.

The interest paid is an expense to the company, and will be paid out of its cash or bank.

Therefore, the journal entry is:

Debit Interest Expense Account $22,000

Credit Cash/Bank Account $22,000.