The anniversary date of a $100,000, 6% bond is June 30. Interest is to be paid t

Question

The anniversary date of a $100,000, 6% bond is June 30. Interest is to be paid twice per year. Entries related to interest are recorded each month. The entry to record the payment of interest on December 31 includes a:

a. debit to interest payable of $2,500; debit to interest expense of $500; credit to cash of $3,000

b. debit to interest expense of $3,000, credit to cash of $3,000

c. credit to cash of $2,500, debit to interest expense of 2,500

d. credit to interest payable of $2,500, debit to interest expense of $2,500

Explanation / Answer

Calculate interest :

100000*6%*6/12 = $3000

=3000/6 = 500 per month

Option A is correct, that is debit to interest payable of 2500, debit to interest expense of 500 credit to cash of 3000

Since the interest is recorded every month using the current laibilty account , that is interes payable and it is credited with the last 5 months interest , that is 5*500 = 2500, hence while making the payment liability account need to reduced and last month interest expense is debited with the amount of 500, as interest expense need to be recorded for the current month,.

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