Bay Company acquires 60 8% 5 year $1000 Community bonds on January 1 2017 for $60000. Assume Community pays interest on January 1. The journal entry at December 31 2017 would include a credit to

Question

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The company acquired 60 bonds, each with a face value of $1000 and an 8% interest rate. This means that each bond will generate $80 of interest per year (1000 x 0.08). In total, the 60 bonds will generate $4800 of interest per year (60 x 80 x 1).

Since Community pays interest on January 1, the interest for the entire year will be accrued as of December 31. Therefore, at December 31, 2017, Bay Company will have earned $4800 of interest income. The journal entry will include a debit to Interest Receivable for $4800 and a credit to Interest Revenue for $4800.

Option A is incorrect because it only represents half of the interest that was earned. Option B is also incorrect because the interest earned is not an expense for Bay Company, but rather revenue. Option C is incorrect because the interest earned is not an accrued expense, but rather revenue earned.

Bay Company Acquires 60 8% 5 Year $1000 Community Bonds