Wize University Introduction to Financial Accounting Textbook > Long-Term Liabilities
Recording Bond Interest Accrual
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Journal Entry: Interest Accrual
At the end of the accounting period, any accrued interest on bonds must be expensed in an adjusting journal entry.
Accruing Interest
- Debit Interest expense: the portion of the next interest expense that has already been accrued (has already passed).
- Credit: Interest payable: the portion of the next interest payment that has already been accrued.
- Debit/Credit Premium or Discount: the difference between the expense the and payment.
Exam Tip
When accruing interest, always use the information from the first payment date following the accrual date.
Recording a payment following an accrual
- Debit Interest expense: the portion of the interest expense incurred after the accrual date.
- Debit Interest payable: the interest payable from the accrual date.
- Credit Cash: the complete coupon payment
- Debit/Credit Premium or Discount: the amount remaining to balance the journal entry.
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Example: Accruing Interest
ABC Inc. issued a 5-year semi-annual bond with a coupon rate of 10% and a face value of $100,000. The market rate at issuance was 8% and the company's fiscal year ends on December 31.
Using the amortization table, prepare the journal entry to record the accrual of interest on December 31st, 2020 and the coupon payment on February 1st, 2021.
Journal entry to record the accrual of interest on December 31st, 2020
Journal entry to record the coupon payment on February 1st, 2021.
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Example: Recording Bond Interest Accrual
United Airlines issued bonds with a face value of $250,000 and a coupon rate of 5%, coupons are paid semi-annually. The bonds mature in 10 years and at the time of issuance the market rate was 7%. Prepare the journal entry to record the accrual of interest on December 31, 2020 and the coupon payment on March 1st, 2021.
Journal entry to record the accrual of interest on December 31st, 2020
Journal entry to record the coupon payment on March 1st, 2021.
Practice: Recording Bond Interest Accrual
On January 1st, 2020, Wize Corp. issued bonds with a face value of $400,000 and a stated rate of 6%. The coupons are paid semi-annually on January 1st and July 1st and will expire in 10 years. The market rate at the time of issuance was 8% and the bonds were initially sold for $345,643.60.
- Prepare the journal entry to record the accrual of interest at the company's fiscal year-end, October 31st, 2020.
- Prepare the journal entry to record the coupon payment on January 1st, 2021.
Prepare the journal entry to record the accrual of interest at the company's fiscal year-end, October 31st, 2020. Round final answers to the nearest dollar.
Transactions:
| Account | Debit | Credit |
|---|---|---|
Practice: Recording Bond Interest Accrual
On April 1st, 2020, Apple Inc. issued 5-year bonds with a coupon rate of 7% paid annually on April 1st. The market rate at issuance was 6% and the face value of the bonds was $2,000,000. The company's fiscal year ends December 31.
Prepare the journal entry to record the accrual of interest on December 31, 2020 and the coupon payment on April 1st, 2021.
Round present value factors to 4 decimal places and round answers to the nearest dollar.
December 31, 2020
Transactions:
| Account | Debit | Credit |
|---|---|---|