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.

(a) The issuance of the bonds on April 1, 2017:

Pharoah Company issued bonds at par value, meaning that the bonds were sold for their face amount. However, since the bonds are dated January 1 and the interest is paid semiannually, we also need to account for the accrued interest from January 1st to April 1st, which is 3 months (or 1 quarter) of interest.

To calculate the accrued interest: Interest Rate per Period = 12% annually / 2 = 6% semiannually Interest for 3 Months = (6% semiannual rate / 2) * Principal = 3% * $990,000 = $29,700

Journal entry for the issuance of the bonds with accrued interest is as follows:

April 1, 2017 Debit: Cash $1,019,700 [($990,000) + (Accrued Interest $29,700)] Credit: Bonds Payable $990,000 Credit: Interest Payable $29,700

This entry recognizes that the company received cash from the bond issuance and that it has an obligation to pay back the principal (Bonds Payable) and the interest that has accrued since the start of the year (Interest Payable).

(b) The payment of interest on July 1, 2017:

Now we need to record the payment of interest that is due. The first interest payment covers the period from January 1st to July 1st which is 6 months of interest.

Interest Payment = Semiannual Interest Rate * Principal = 6% * $990,000 = $59,400

Journal entry for the payment of interest is as follows:

July 1, 2017 Debit: Interest Payable $29,700 [From the accrued interest payable at the time of bond issuance] Debit: Interest Expense $29,700 [The rest of the interest for April to June] Credit: Cash $59,400

This entry clears the interest payable that was recognized when the bonds were issued and also recognizes the interest expense for the period that has not been paid or accrued yet.

(c) The accrual of interest on December 31, 2017:

We need to record the interest expense that has accrued by the end of the year for the period from July 1st to December 31st which is another 6 months.

Journal entry for the accrual of interest is as follows:

December 31, 2017 Debit: Interest Expense $59,400 Credit: Interest Payable $59,400

This entry records the interest expense that has been incurred but not yet paid at the end of the year and is due on the next payment date which is January 1, 2018.

When a company issues bonds, it is essentially borrowing money from investors. The bond's par value, or face value, is the amount that the company must repay at the bond's maturity date. Interest on these bonds is usually paid at regular intervals (e.g., semiannually), and the interest rate stated on the bond is the annual rate that is to be applied to the par value to determine the interest payment amount.

It is important to understand that bond interest payments are an expense to the company issuing the bond, which is why they appear as Interest Expense in the company's books. When interest accrues but is not yet paid, it becomes a liability and is recorded as Interest Payable. Over time, as the company pays interest to bondholders, it reduces this liability. The issuance of bonds and the payment of interest are critical transactions that need careful accounting to ensure the company's financial statements accurately represent the company's financial position and performance.