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26 September, 12:54

Pretzelmania, Inc., issues 7%, 10-year bonds with a face amount of $70,000 for $70,000 on January 1, 2021. The market interest rate for bonds of similar risk and maturity is 7%. Interest is paid semiannually on June 30 and December 31.

Required:

Record the bond issue and first interest payment on June 30, 2021.

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  1. 26 September, 13:31
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    The bond issue and first interest payment on June 30, 2021 journal entries would be as follows:

    January 1, 2021

    Debit Credit

    Cash $70,000

    Bond payable $70,000

    June 30, 2021

    Debit Credit

    Interest Expense $2,450

    Cash $2,450

    Explanation

    The journal entry for the bond issue would be the following:

    January 1, 2021

    Debit Credit

    Cash $70,000

    Bond payable $70,000

    In order to prepare the journal entry for first interest payment on June 30, 2021 we would have to calculate the interest expense as follows:

    interest expense=face value of bonds*interest rate * (6 months/12 months)

    interest expense=$70,000*7% * (6 months/12 months)

    interest expense=$4,900 * (6 months/12 months)

    interest expense=$2,450

    Therefore, the journal entry for first interest payment on June 30, 2021 would be as follows:

    June 30, 2021

    Debit Credit

    Interest Expense $2,450

    Cash $2,450
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