Question

Thomson Co. produces and distributes semiconductors for use by computer manufacturers. Thomson Co. issued $900,000 of 10-year, 7% bonds on May 1 of the current year at face value, with interest payable on May 1 and November 1. The fiscal year of the company is the calendar year.
May 1. Issued the bonds for cash at their face amount.
Nov. 1. Paid the interest on the bonds.
Dec. 31. Recorded accrued interest for two months.

Required:
Journalize the entries to record the above selected transactions for the current year.

Answer 1

Answer:

May 1

Cash                                  $900000 Dr

   Bonds Payable                  $900000 Cr

November 1

Interest Expense                $31500 Dr

     Cash                                    $31500 Cr

Dec 31

Interest Expense                $10500 Dr

     Interest Payable                  $10500 Cr

Explanation:

May 1

The bonds are issued at face value which means the company has received full amount of face value which is $900000. So, we debit cash by $900000 and credit bonds payable by the same amount.

Nov 1

The bonds pay interest semi annually and the amount of semi annual interest is,

Semi annual interest = 900000 * 0.07 * 6/12 = $31500

So, when this interest is paid, interest expense is recorded by $31500 as debit and cash is credited by same amount.

Dec 31

Following the accrual basis of accounting, the interest on bond that relates to November and December of the current year will be recorded as a liability and as an expense for this year. Thus, the amount of the interest will be,

Interest accrued - two months = 900000 * 0.07 * 2/12  = 10500