Ruben Company purchased $100,000 of Evans Company bonds at 100 plus $1,500 in accrued interest. The bond interest rate is 8% and interest is paid semi-annually. The journal entry to record the receipt of interest on the next interest payment date would be:
A.Debit: Cash $4,000; Credit: Interest Revenue $4,000
B.Debit: Cash $4,000; Credit: Interest Receivable $4,000
C.Debit: Cash $4,000; Credit: Interest Receivable $1,500 and Interest Revenue $2,500
D.Debit: Cash $2,500; Credit: Interest Revenue $2,500
C.Debit: Cash $4,000; Credit: Interest Receivable $1,500 and Interest Revenue $2,500
The correct answer is D.
The journal entry to record the receipt of interest on the next interest payment date would be:
Debit: Cash $2,500
Credit: Interest Revenue $2,500
This is because Ruben Company purchased the bonds at a premium of $1,500, which means that $1,500 of the purchase price was for accrued interest. Therefore, only $2,500 of the payment received would be recognized as interest revenue.
To determine the correct answer to this multiple-choice question, let's break down the information given and understand how to calculate the interest payment and the journal entry.
The face value of the bonds purchased was $100,000, and Ruben Company purchased them at 100, which means they paid the full face value. Additionally, Ruben Company paid $1,500 in accrued interest, which means interest has accumulated since the last interest payment date.
The bond interest rate is given as 8%, which means the annual interest payment is calculated as 8% of $100,000, or $8,000. Since interest is paid semi-annually, the amount paid every six months would be $8,000 divided by 2, or $4,000.
Now, let's analyze the options provided:
A: Debit: Cash $4,000; Credit: Interest Revenue $4,000
This option assumes that the full $4,000 interest payment was received on the next interest payment date. However, Ruben Company purchased the bonds with accrued interest of $1,500, so only $2,500 of interest would be received on the next payment date.
B: Debit: Cash $4,000; Credit: Interest Receivable $4,000
This option records the correct amount of cash received ($4,000), but it does not account for the accrued interest of $1,500.
C: Debit: Cash $4,000; Credit: Interest Receivable $1,500 and Interest Revenue $2,500
This option correctly accounts for the cash received ($4,000) and the accrued interest ($1,500). It splits the interest revenue between the accrued interest ($1,500) and the interest received on the payment date ($2,500).
D: Debit: Cash $2,500; Credit: Interest Revenue $2,500
This option only considers the interest received on the payment date and does not account for the accrued interest of $1,500.
Based on the above analysis, the correct answer would be option C:
Debit: Cash $4,000; Credit: Interest Receivable $1,500 and Interest Revenue $2,500.
This journal entry correctly reflects the amount of cash received, the accrued interest that is still outstanding, and the interest revenue earned on the next interest payment date.