Winrow Co. purchased 50, 6% Johnston Company bonds for $50,000 cash plus brokerage fees of $500. Interest is payable semiannually on July 1 and January 1. The entry to record the July 1 semiannual interest payment would include a

Question

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Since Winrow Co. purchased the bonds, it is the bondholder and will receive interest payments from the issuer, Johnston Company. The 6% interest rate on the bonds means that Winrow Co. will receive interest of $3,000 ($50,000 x 6% x 6/12) every six months.

To record the receipt of interest on July 1, Winrow Co. should make the following entry:

Interest Receivable        $3,000 
     Interest Revenue            $3,000

However, since the interest was already earned and there is no need to accrue it, we only need to record the receipt of cash on the payable date. Therefore, the correct entry on July 1 is:

Cash                           $3,000 
     Interest Revenue            $3,000

Therefore, the entry to record the July 1 semiannual interest payment would include a credit to Interest Revenue for $1,500 ($3,000/2). Choice B is the correct answer.

Winrow Co Purchased 50, 6% Johnston Company Bonds for $50,000 Cash