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ACCRUALS OF BOND INTEREST

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:

May 1, 19X1         
Cash                 9,600                  
Bond Discount   400
Bonds Payable             10,000

Nov. 1, 19X1 
Interest Expense   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.)

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.
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