Final answer:
The correct journal entry for The A Company to accrue bond interest on December 31, 20X1, is a debit to Bond Interest Receivable and a credit to Bond Interest Income for $5,000, which corresponds to the accrued interest for two months.
Step-by-step explanation:
The A Company purchased bonds with a total face value of $500,000 for $450,000 on August 1, 20X1. The bonds pay an annual interest rate of 6 percent, with payments due on May 1 and November 1 each year. To answer the student's question, we need to calculate the interest that has accrued by December 31, 20X1, which requires a pro-rata calculation of the interest from the last payment date, November 1, until December 31. Since the annual interest rate is 6 percent of the $500,000 face value, the semi-annual interest payment would be $15,000 (6% divided by 2 times $500,000).
The interest for one month would therefore be $15,000 divided by 6, as there are six months in a semi-annual period, resulting in $2,500 per month. For the 2 months from November 1 to December 31, the accrued interest would be $5,000 ($2,500 x 2 months).
The journal entry to record this accrued interest would be a debit to Bond Interest Receivable for $5,000 and a credit to Bond Interest Income for $5,000. This reflects the interest that The A Company has a right to receive as of December 31, even though the cash has not yet been received.
The correct answer to the student's question is option 3): A debit to Bond Interest Receivable and a credit to Bond Interest Income of $5,000.