On January 1, Year 1, McGee Corporation issues 5%, 10-year bonds with a face amount of $100,000. On issuance date, the market rate of interest is 5%; therefore, the issue price of the bonds is $100,000. Interest is paid semiannually on June 30 and December 31. The first payment of interest on June 30 will include a:Multiple Choicedebit to Interest Expense for $2,500debit to Interest Expense for $5,000credit to Bonds Payable for $2,500credit to Bonds Payable for $5,000
Question
On January 1, Year 1, McGee Corporation issues 5%, 10-year bonds with a face amount of 100,000. Interest is paid semiannually on June 30 and December 31. The first payment of interest on June 30 will include a:Multiple Choicedebit to Interest Expense for 5,000credit to Bonds Payable for 5,000
Solution
The correct answer is "debit to Interest Expense for $2,500".
Here's the step-by-step explanation:
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The bond's face amount is 100,000 * 5% = $5,000.
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However, the interest is paid semiannually, which means it's paid twice a year. So, each payment is 2,500.
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On June 30, when the first payment is made, the company will record a debit (increase) to Interest Expense for $2,500. This represents the cost of borrowing money for the first half of the year.
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There is no change to Bonds Payable at this time because this account represents the amount of money the company owes to bondholders, which does not change when interest is paid.
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