Question

On April 1, 2017, Pharoah Company issued $990,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1. Prepare journal entries to record the following. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Record journal entries in the order presented in the problem.) (a) The issuance of the bonds. (b) The payment of interest on July 1. (c) The accrual of interest on December 31.

Answer 1

(a)

April 1, 2017

Dr. Cash $990,000

Cr. Bond Payable $990,000

(b)

July 1, 2017

Dr. Interest Expense $59,400

Cr. Cash $59,400

(c)

December 31, 2017

Dr. Interest Expense $59,400

Cr. Interest on Bond Payable $59,400

Step-by-step explanation:

Bond issued is a liability as company receives cash against the issuance of bond which will be repaid on a specific time.

Interest is calculated using Face value and coupon ate of the bond. As the interest is being paid semiannually, so interest expense will be as follow after each 6 months.

Interest Expense = $990,000 x 12% x 6/12 = $59,400

As the payment of the loan will be made on January 1, So on December 31 at the year end interest expense accrual is recorded according to the accrual concept of accounting. A liability of Interest on Bond Payable is arose and it will be paid on January 1.