Question

The problems we have worked on in class have consistently been bonds that have been purchased at the date of their payments (i.e. January 1 for a bond that pays June 30 and December 31)

If the bond was bond intra period, (i.e. March 16th) but pays on June 30th, what would you need to consider in preparing the journal entries for this particular fact patter. You can use numbers as an example or simply explain the process

Answer 1

assume the Valley bonds were dated October 31, issued on that same date, and pay interest each April 30 and October 31. Valley must make an adjusting entry on December 31 to accrue interest earned for November and December but not paid until April 30 of the next year. That entry would be:

		Debit	Credit
Dec 31	Bond Interest Expense ($100,000 x 12% x 2 months / 12 months)	2,000
	Interest Payable (or Bond Interest Payable)		2,000
	To record accrued interest for November and December payable in April.

The April 30 entry in the next year would include the accrued amount from December of last year and interest expense for Jan to April of this year. We will credit cash since we are paying cash to the bondholders.

	Debit	Credit
Dec 31	Bond Interest Expense ($100,000 x 12% x 4 months / 12 months)	4,000
	Interest Payable (or Bond Interest Payable)	2,000
	Cash ($100,000 x 12% x 6 months / 12 months)		6,000
	To record payment of 6 months bond interest.

Since the 6-month period ending October 31 occurs within the same fiscal year, the bond interest entry would be:

		Debit	Credit
Oct 31	Bond Interest Expense ($100,000 x 12% x 6 months / 12 months)	6,000
	Cash		6,000
	To record semiannual interest payment.

Each year Valley would make similar entries for the semiannual payments and the year-end accrued interest. The firm would report the $2,000 Bond Interest Payable as a current liability on the December 31 balance sheet for each year.