On January 1, bonds with a face value of $500,000, an interest rate of 8%, and a 10-year maturity were sold for $530,000. These bonds require semiannual interest payments on June 30 and December 31. The correct journal entry for the June 30 interest payment is as follows: Debit: Interest Expense $20,000 Credit: Cash $20,000 (To record the semiannual interest payment of 4% on the $500,000 face value of the bonds.)
Business · High School · Thu Feb 04 2021
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The correct journal entry for the June 30 interest payment is actually:
Debit: Interest Expense $20,000 Credit: Cash $20,000
This entry reflects the semiannual payment of interest on the bond. Since the bonds have an 8% annual interest rate and interest is paid semiannually, each payment represents six months of interest. Hence, the interest rate for each semiannual period is 4% (which is half of the 8% annual rate).
To calculate the interest payment: Interest Payment = Face Value of Bonds × Semiannual Interest Rate Interest Payment = $500,000 × 4% Interest Payment = $500,000 × 0.04 Interest Payment = $20,000
So, you debit Interest Expense to recognize the cost of borrowing for the period, and you credit Cash because cash is paid out to the bondholders.