Answer:
Step-by-step explanation:
When a company issues bonds, it typically pays periodic interest to bondholders. In this case, Riddle Corporation issued $500,000 of 8%, 5-year bonds at 100, meaning the bonds were sold at their face value.
The bonds have a face value of $500,000, and the interest rate is 8%. Since interest is payable semi-annually, the annual interest payment is calculated as follows:
Annual interest payment = Face value of bonds * Annual interest rate
= $500,000 * 8% = $40,000
Since interest is payable semi-annually, the semiannual interest payment is half of the annual interest payment:
Semiannual interest payment = Annual interest payment / 2
= $40,000 / 2 = $20,000
The journal entry to record the semiannual interest payment on December 31, 2011, would be:
1. Debit Interest Expense: $20,000
2. Credit Cash: $20,000
This entry reflects the expense of interest on the income statement and the payment of cash on the balance sheet.