If a corporation has prepared a bond with a date of January 1, 2009 but delays
issuing the bond until February 1, the investors buying the bonds on February 1
will have to pay the issuing corporation one month of accrued interest.
(The delay may have been caused by a turbulent financial market or some
other situation.)
Let’s illustrate this scenario with a corporation preparing to issue a
9% $100,000 bond dated January 1, 2009. The bond will mature in 5 years
and requires interest payments on June 30 and December 31 of each year until
December 31, 2013. The bond is issued on February 1 at its par value plus
accrued interest.
Since the bond was sold to investors at par, the issuing corporation will receive
100% of the bond’s face value plus one month of accrued interest. The accrued
interest amounts to $750 ($100,000 x 9% x 1/12). In total the issuing corporation
will receive $100,750. The journal entry for this transaction is:
Note that the total amount received is debited to the Cash account and the bond's
face amount is credited to Bonds Payable. The $750 received by the corporation
for the accrued interest is credited to Interest Payable. The corporation is
receiving the $750 because the corporation is required to pay the bondholders
$4,500 ($100,000 x 9% x 6/12) on June 30. The difference between the $4,500
paid on June 30 and the $750 received on February 1, 2009 is $3,750—equal to
five months of interest for the months of February through June: $100,000 x 9% x 5/12.
Journal Entries for Interest Expense – Annual Financial Statements
If a corporation that is planning to issue a bond dated January 1, 2009 delays issuing
the bond until February 1, the corporation will not have interest expense during
January. Assuming the corporation has an accounting year that ends on December 31,
it will have eleven months of interest expense during the year 2009. During each of the
subsequent years 2010, 2011, 2012, and 2013 the corporation will have twelve months
of interest expense equal to $9,000 ($100,000 x 9% x 12/12).
If the corporation issues only annual financial statements, its journal entries for
its interest payments during the year 2009 will be:
| Jun 30, 2009 |
Interest Expense |
3,750 |
|
| Dec 31, 2009 |
Interest Expense |
4,500 |
|
Note that the total amount of interest expense in 2009 will be $8,250
($3,750 recorded on June 30 + $4,500 recorded on December 31). This amount
of interest expense for February 1 through December 31, 2009 is confirmed
by the following calculation: $100,000 x 9% x 11/12 = $8,250.
In the year 2010, the journal entries will be:
| Jun 30, 2010 |
Interest Expense |
4,500 |
|
| Dec 31, 2010 |
Interest Expense |
4,500 |
|
In the year 2010, the interest expense will be $9,000
($4,500 + $4,500 = $9,000; or $100,000 x 9% = $9,000)
because the bond will be outstanding for a full year.
The entries will be similar for the years 2011, 2012, and 2013.
Journal Entries for Interest Expense – Monthly Financial Statements
If monthly financial statements are issued by the corporation, the following journal entries
are needed in the year 2009 (including the entry when the bonds were issued on February 1,
2009):
| Feb 28, 2009 |
Interest Expense |
750 |
|
| Mar 31, 2009 |
Interest Expense |
750 |
|
| Apr 30, 2009 |
Interest Expense |
750 |
|
| May 31, 2009 |
Interest Expense |
750 |
|
| Jun 30, 2009 |
Interest Expense |
750 |
|
| Jun 30, 2009 |
Interest Payable |
4,500 |
|
| Jul 31, 2009 |
Interest Expense |
750 |
|
| Aug 31, 2009 |
Interest Expense |
750 |
|
| Sep 30, 2009 |
Interest Expense |
750 |
|
| Oct 31, 2009 |
Interest Expense |
750 |
|
| Nov 30, 2009 |
Interest Expense |
750 |
|
| Dec 31, 2009 |
Interest Expense |
750 |
|
| Dec 31, 2009 |
Interest Payable |
4,500 |
|
Note that in 2009 the corporation's entries included 11 monthly
adjusting entries to accrue $750 of interest expense plus the
June 30 and December 31 entries to record the semiannual interest
payments. As a result of these journal entries, each monthly income
statement will report one month of interest expense and the balance
sheet will report a current liability for the amount of interest incurred
by the corporation but not yet paid to the bondholders.
In each of the years 2010 through 2013 there will be 12 monthly
entries of $750 each plus the June 30 and December 31 entries for
the $4,500 interest payments.
|
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