Practice Quiz

Case Interview Prep

Category - Accounting

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If the interest on a bond accrues daily and the interest payment is only due semi-annually, how would the issuing corporation report the interest expense at month-end on a 10-year $50,000 8% bond (assuming the month end is not the month in which an interest payment is made)?
  1. Debit Interest Expense $2,000; credit Interest Payable $2,000
  2. Debit Interest Expense $333; credit Interest Payable $333
  3. Debit Interest Payable $500; credit Interest Expense $500
  4. Debit Interest Expense $333; credit Cash $333
  5. Debit Interest Expense $2,000; credit Cash $2,000
Explanation
Answer - B - The entry to note month-end interest payments for an 8% $50,000 10-year bond would be:
Debit: Interest Expense $333
Credit: Interest Payable $333

Key Takeaway: Step one is to determine the monthly interest expense ($50,000 x .08 x 1/12) = $333. Interest expense will be incurred daily and recorded at month end, with the monthly total debited to Interest Expense and credited to the Interest Payable account.
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