Level 6: Bonds and leases · Exercise 71 of 72 · Pro

Accruing bond interest at year end

A journal entry exercise from Journaldrill. Solve it with an account picker and debit and credit fields in your browser, and it is checked the moment you submit.

The task

On October 1, Ashford Rail Services issued $400,000 of 10-year, 7% bonds at 97. Interest is paid each April 1 and October 1, and the discount is amortized by the straight-line method. Ashford's year ends December 31. Record the December 31 adjusting entry for three months of interest.

What this exercise teaches

Interest owed for October through December is $400,000 x 7% x 3/12 = $7,000, credited to Interest Payable. The $12,000 discount ($400,000 x 3%) is spread over 120 months, so three months is $300, credited to Discount on Bonds Payable. Interest expense is $7,000 + $300 = $7,300. On April 1 the accrued liability will be paid along with the next three months of interest.

A hint if you get stuck

No cash moves at year end: accrue the stated interest owed and amortize the discount for the months since issue.