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Austin Corporation issues $6,000,000 of 10%,10-year bonds,dated December 31,Year 1.The bonds are issued on April 30,Year 2,at 100 plus accrued interest.Interest on the bonds is payable semiannually each June 30 and December 31.
-The entry to record the issuance of bonds payable on April 30,Year 2,includes:
A)A credit to Premium on Bonds Payable of $200,000.
B)A debit to Cash of $150,000.
C)A debit to Bond Interest Expense of $200,000.
D)A credit to Bond Interest Payable of $200,000.

Question

Quizplus · Accepted Answer

The correct answer is D) A credit to Bond Interest Payable of $200,000. This is because the bonds are issued at 100 plus accrued interest from December 31, Year 1, to April 30, Year 2, which is 4 months. The annual interest is 10% of $6,000,000, which equals $600,000. For 4 months, the accrued interest is $600,000 * (4/12) = $200,000. This amount is credited to Bond Interest Payable to recognize the liability for the interest that has accrued up to the issuance date.

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