Question

On January 1, 2021, Peach Corporation issues $600,000, 5-year, 7% bonds at par. Interest is paid semiannually on January 1 and July 1. Peach Corporation uses the straight-line method of amortization. The company's fiscal year ends on December 31. Which of the following statements about the journal entry for these bonds on July 1, 2021 is TRUE?

a. The entry decreases assets and increases stockholder's equity
b. The entry increases expenses and increases assets.
c. The entry decreases net income and increases liabilities
d. The entry decreases assets and stockholder's equity

Answer 1

The correct option is d. The entry decreases assets and stockholder's equity.

Step-by-step explanation:

Since interest is paid semiannually on January 1 and July 1, that means cash has to be paid on July 1, 2021 as interest on bond.

Since cash is a current asset, that means the the payment of cash as intetest enxpen on July 1, 2021 will decrease asset.

Since the amount of interest expense on bond paid July 1, 2021 will reduce net income which is one of the elements of stockholder's equity, the entry will also therefore decrease the stockholder's equity.

Therefore, the correct option is d. The entry decreases assets and stockholder's equity.