Landmark buys $300,000 of Schroeter Company's 8%, 5-year bonds payable at par value on September 1. Interest payments are made semiannually on March 1 and September 1. The journal entry Landmark should record to accrue interest earned at year-end December 31 is:

Question

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Since the interest payments are made semiannually on March 1 and September 1, as of December 31 (the end of the year), Landmark would have earned interest on only half of the bond maturity period (2.5 years). Therefore, the accrued interest should be calculated as follows:

Interest earned = Bond face value x Interest rate x Fraction of year elapsed
= $300,000 x 8% x 2.5/12
= $6,000

Landmark should debit Interest Receivable (an asset account) for $6,000 (the accrued interest), and credit Interest Revenue (an income account) for $6,000.

However, since the question asks for the journal entry to record interest earned at year-end December 31, it is assumed that Landmark has already received the semi-annual interest payment on September 1. Therefore, only half of the annual interest payment of $16,000 ($300,000 x 8%) needs to be accrued for the remaining six months (October to December). Hence, the correct journal entry would be:

Debit Interest Receivable $8,000, Credit Interest Revenue $8,000.

Landmark Buys $300,000 of Schroeter Company's 8%, 5-Year Bonds Payable