Question

The Crane Company issued $250,000 of 10% bonds on January 1, 2020. The bonds are due January 1, 2025, with interest payable each July 1 and January 1. The bonds are issued at face value. Prepare Crane’s journal entries for
(a) the January issuance,
(b) the July 1 interest payment, and
(c) the December 31 adjusting entry

Answer 1

Answer:

a) issuance of bonds:

Cash/bank $250000

                  Bonds $250000

b) Interest payment

Interest expense  $12500 ($25000×6÷12)

                         cash/bank  $12500

c) Adjusting entry

Interest expense $12500 ($25000×6÷12)

                       cash/bank  $12500

Explanation:

Crane has used bonds as a long-term source of finance. The bonds are redeemable after five years which means Crane will have to create a liability and record cash received. The interest paid each year is coupon rate agreed upon issuance of bonds. Interest is calculated on par value of the bond, therefore the interest payment for the year is $25000 ($250000×10%), payable on a half yearly basis. So the interest payment of $25000 will be split between six months and expense recognized.

The journal entries are as follows:-

a) issuance of bonds:

Cash/bank $250000

                  Bonds $250000

b) Interest payment

Interest expense  $12500 ($25000×6÷12)

                         cash/bank  $12500

c) Adjusting entry

Interest expense $12500 ($25000×6÷12)

                       cash/bank  $12500

Adjusting entries are passed at the year end in order to comply with the accruals concept of accounting which requires entities to recognize expenses and revenues in the year they are incurred and earned. So the remaining interest payment (july to dec) relates to the current financial year and hence entry c (above) is recorded to conclude the financial year.