Question

A company issued 8%, 15-year bonds with a par value of $550,000 that pay interest semiannually. The market rate on the date of issuance was 8%. The journal entry to record each semiannual interest payment is: Multiple Choice Debit Bond Interest Expense $22,000; credit Cash $22,000. Debit Bond Interest Expense $44,000; credit Cash $44,000. Debit Bond Interest Payable $22,000; credit Cash $22,000. Debit Bond Interest Expense $550,000; credit Cash $550,000. No entry is needed, since no interest is paid until the bond is due.

Answer 1

Debit Bond Interest Expense $22,000; credit Cash $22,000

Step-by-step explanation:

The interest payment on the bonds is based on the face value of the bond and coupon interest rate of the bond. If interest is paid semiannually the coupon annual rate should also be calculated for 6 months to calculate the semiannual payment.

As per given data

Face value = $550,000

Coupon Rate = 8% annually

Coupon rate = 8% / 2 = 4% semiannually

Semiannual payment of interest = Face value x Coupon rate

Semiannual payment of interest = $550,000 x 4%

Semiannual payment of interest = $22,000