Answer: Please refer to the explanation section
Step-by-step explanation:
Bonds are another form of debt financing, When a Company issues Bonds , the will be Obligated to make interest payment as per the bond agreement and also Repay the Face Value of the Bond at the end of the period (when the Bond reaches its maturity period). The Face Value of a Bond is used when calculating Interest Payment. Interest Payments of a Bond (also Known as Coupon payments) is calculated by Taking the Face Value of a Bond and Multiply it by the effective interest rate, that is an annual interest rate that is adjusted by the number of times interest payment are made in a year.
Bond Interest Payments or coupon Payments are recognised as Interest expense in the income statement as they represent interest expense incurred resulting from a Company's Liabilities.
We will assume that the amount of $431 721 is the Face Value of the Bond since the question didn't specify.
Market interest rate = 9%. Interest payment are made in every 6 months or twice a year (semi annually), The Annual interest rate of 9% must be divided by 2. Therefore the effective interest rate = 9%/2 = 4.5% semi annually
Face Value = $431 721
r = 9%/2 = 4.5%
Journal entries
1 January 2021
Dr Bank $431 721
Cr Bonds Long term Liability $431 721
recording bonds issue
30 June 2021
Dr Interest expense $19427.45
Cr Bank $19427.45
recording the first interest payment. Cash decreases when Payments are made thus we process a credit entry to the bank to indicate that cash is decrease when interest expense is paid
30 December 2021
Dr Interest expense $19427.45
Cr Bank $19427.45
recording the second interest payment