Question

Pretzelmania, Inc., issues 7%, 10-year bonds with a face amount of $70,000 for $70,000 on January 1, 2018. The market interest rate for bonds of similar risk and maturity is 7%. Interest is paid semiannually on June 30 and December 31. 1. & 2. Record the bond issue and first interest payment on June 30, 2018

Answer 1

Answer:

January 1, 2018

Dr. Cash                $70,000

Cr. Bond Payable $70,000

June 30, 2018

Dr. Interest Expense $2,450

Cr.  Cash                    $2,450

Explanation:

If the market rate is equal to the coupon rate of a bond, the bond will be issued at par. Bond is recognised as a liability and recorded in the account of Bond Payable.

Interest is paid on the face value and stated rate of the bond.

Interest Payment = Face value x Coupon rate x 6/12 = $70,000 x 7% x 6/12 = $2,450.