Question

Question 3

A company issued 8%, 15-year bonds with a par value of $470,000 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 $37,600; credit Cash $37,600.

• Debit Bond Interest Expense $18,800; credit Cash $18,800.

• Debit Bond Interest Payable $31,333; credit Cash $31,333.

• No entry is needed, since no interest is paid until the bond is due.

• Debit Bond Interest Expense $420,000; credit Cash $420,000.

On July 1, Shady Creek Resort borrowed $370,000 cash by signing a 10-year, 7% installment note requiring equal payments each June 30 of $52,680. What is the journal entry to record the first annual payment?

Multiple Choice

• Debit Interest Expense $25,900; credit Cash $25,900.

• Debit Cash $370,000; debit Interest Expense $52,680; credit Notes Payable $422,680.

• Debit Interest Expense $25,900; debit Interest Payable $26,780; credit Cash $52,680.

• Debit Interest Expense $25,900; debit Notes Payable $26,780; credit Cash $52,680.

• Debit Interest Expense $52,680; credit Cash $52,680.

Answer 1

Part 1

The correct answer is

Debit bond interest expense $18800; credit cash $18800

Calculations

Interest expense = 470000×8%×1/2

= $18800

Interest expense has been debited by $18800 and it has been paid, so cash has been credited by $18800

Part 2

The correct answer is

Debit interest expense $25900; debit notes payable $26780; credit cash $52680

Calculations

Interest expense = 370000 *7%

= 25900

Note payable will be debited by =52680 - 25900

= $26780

Since annual payment has to be made, cash will be credited by $52680