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Up to this point all the situations that we have discussed dealt with an interest payment date of December 31. If the payment date is other than December 31, an adjustment entry must be made on December 31 to accrue the interest from the last payment date and also to amortize the discount or premium as well.
On May 1, 19X1 Berger Corporation issues a $10,000, 10%, 4-year bond at 96. The bond pays interest semiannually on November 1 and May 1. The entries are:
On May 1, 19X1 Berger Corporation issues a $10,000, 10%, 4-year bond at 96. The bond pays interest semiannually on November 1 and May 1. The entries are:
May 1, 19X1
Cash 9,600
Bond Discount 400
Bonds Payable 10,000
Bonds Payable 10,000
Nov. 1, 19X1
Interest Expense 500
Cash 500
Cash 500
Interest Expense 50
Bond Discount 50
400 ÷ 4 years × 1/2 year.
Dec. 31, 19X1
Interest Expense 166.67
Interest Payable 166.67
10,000 × 10% × 2/12 (To accrue 2 months of interest.)
Interest Payable 166.67
10,000 × 10% × 2/12 (To accrue 2 months of interest.)
This entry will be reversed on January 1, 19X2, if the company makes reversing entries.
Dec. 31, 19X1
Interest Expense 16.67
Bond Discount 16.67
400 ÷ 4 × 2/12.
Bond Discount 16.67
400 ÷ 4 × 2/12.
