Duval Company issues four-year bonds with a $109,000 par value on January 1, 2021, at a price of $104,910. The annual contract rate is 5%, and interest is paid semiannually on June 30 and December 31. 2. Prepare journal entries to record the first two interest payments.
To record the first interest payment on June 30, 2021:
June 30, 2021:
Interest Expense 2,180 (($109,000 x 0.05) / 2)
Discount on Bonds Payable 270 (($109,000 - $104,910) / 8)
Cash (Interest Payment) 1,910 (($109,000 x 0.05) / 2 - (($109,000 - $104,910) / 8))
To record the second interest payment on December 31, 2021:
December 31, 2021:
Interest Expense 2,180 (($109,000 x 0.05) / 2)
Discount on Bonds Payable 270 (($109,000 - $104,910) / 8)
Cash (Interest Payment) 1,910 (($109,000 x 0.05) / 2 - (($109,000 - $104,910) / 8))
To prepare the journal entries to record the first two interest payments, we need to determine the amount of interest to be paid and the interest expense recognized.
Step 1: Calculate the semiannual interest payment:
The annual contract rate is 5%, which means the semiannual rate is 2.5% (5%/2).
The par value of the bonds is $109,000, so the semiannual interest payment is $109,000 * 2.5% = $2,725.
Step 2: Prepare the journal entry for the first interest payment on June 30, 2021:
Interest Expense Dr. $2,725
Cash Cr. $2,725
Step 3: Prepare the journal entry for the second interest payment on December 31, 2021:
Interest Expense Dr. $2,725
Cash Cr. $2,725
In both cases, you would debit "Interest Expense" for $2,725 and credit "Cash" for $2,725 to record the interest expense and payment.
To prepare the journal entries to record the first two interest payments, follow these steps:
Step 1: Determine the interest payment amount.
The interest payment for bonds is calculated by multiplying the par value of the bond by the annual contract rate and dividing by the number of interest periods in a year. In this case, since interest is paid semiannually, there are two interest periods in a year.
Interest payment amount = (Par value * Annual contract rate) / Number of interest periods in a year
Par value = $109,000
Annual contract rate = 5%
Number of interest periods in a year = 2
Interest payment amount = ($109,000 * 5%) / 2 = $2,725
Step 2: Record the first interest payment.
On June 30, 2021, the first interest payment is made. To record this transaction, you will debit the Interest Expense account and credit the Cash account.
Journal entry on June 30, 2021:
Date Account Debit Credit
------------------------------------------------------
June 30, 2021 Interest Expense $2,725
June 30, 2021 Cash $2,725
Step 3: Record the second interest payment.
On December 31, 2021, the second interest payment is made. Again, you will debit the Interest Expense account and credit the Cash account.
Journal entry on December 31, 2021:
Date Account Debit Credit
------------------------------------------------------
December 31, 2021 Interest Expense $2,725
December 31, 2021 Cash $2,725
By following these steps, you can prepare the journal entries to record the first two interest payments for the bonds issued by Duval Company.