Question

A company issued 8%, 15-year bonds with a par value of $580,000 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 $46,400; credit Cash $46,400.

• Debit Bond Interest Expense $530,000; credit Cash $530,000.

• Debit Bond Interest Expense $23,200; credit Cash $23,200.

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

• Debit Bond Interest Payable $38,667; credit Cash $38,667.

Answer 1

Correct answer------------Debit Bond Interest Expense $23,200; credit Cash $23,200..

.

Cash Interest on bond (580,000 x 4%)

$            23,200.00

No discount or premium is involved in this bond because the bonds will be issued at Par. The reason why bonds will be issued at par is that the market rate of interest and bond coupon rate are same.

The interest expense will be equal to cash paid for interest.

The interest is paid semiannually so half of 8% is paid.