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EKM, Inc issued 8%, 3-year bonds with a par value of $250,000 that pay interest semiannually....

EKM, Inc issued 8%, 3-year bonds with a par value of $250,000 that pay interest semiannually. The bond was issued at market rate. The journal entry to record each semiannual interest payment is:

Debit Bond Interest Expense $10,000; credit Cash $10,000.

Debit Bond Interest Expense $20,000; credit Cash $20,000.

Debit Cash $20,000; credit Bond Interest Expense $20,000.

Debit Bond Interest Payable $25,000; credit Cash $25,000.

No entry is needed, since no interest is paid until the bond is due.
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Answer #1

Answer

  • Bond face Value $ 250000
  • Interest rate = 8%
  • Interest payment = Semi annual = 6 monthly.
  • Cash interest to be paid = $ 250000 x 8% x 6/12 = $ 10,000
  • Correct Answer = Option #1:
    [Debit] Bond interest expense $ 10,000
    [Credit] Cash $ 10,000
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