Question

On January 1, 2021, for $17.9 million, Seashells Company issued 8% bonds, dated January 1, 2021, with a face amount of $19.9 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semiannually on June 30 and December 31. The journal entry to record interest on June 30, 2021, would include:

Answer 1

Answer:

Cash A/c Dr.                   $796,000

Discount A/c Dr.            $99,000

To,  Interest Revenue         895,000

Explanation:

According to the scenario, computation of the given data are as follows,

Face value = $19.9 million

Issued bond rate = 8% annually or 4% semi annual

So, Cash = $19,900,000 × 4%

= $796,000

Issued bonds value = $17.9 million

Market yield = 10% annual or 5% semi annual

So, Interest revenue = $17,900,000 × 5%

= $895,000

So, Journal entries are as follows,

Jun.30,2021 Cash A/c Dr.                   $796,000

                       Discount A/c Dr.            $99,000

                          To,  Interest Revenue         895,000

                   (Being interest revenue on June30 is recorded)