Seamark buys $300,000 of Eider\'s 8% five-year bonds payable at par value on Sep

Question

Seamark buys $300,000 of Eider's 8% five-year bonds payable at par value on September 1. Interest payments are made semiannually on March 1 and September 1. The journal entry to accrue interest earned at year-end December 31 is: a. Debit Interest Receivable $8,000, credit Interest Revenue $8,000. b. Debit Interest Receivable $12,000, credit Interest Revenue $12,000. c. Debit Cash $8,000, credit Interest Revenue $8,000. d. Debit Cash $12,000, credit Interest Revenue $12,000. e. Debit Interest Revenue $8,000, credit Interest Receivable $8,000.

Explanation / Answer

$8,000 x .12 = $960 in interest per year So therefore, 960/12 = $80 interest revenue/month. The note was issued July 1, and you must prepare financial statements for the end of July (so, therefore, 1 month of interst). Dr. Interest Receivable 80 Cr. Interest Revenue 80 The reason you debit Interest Receivable, is because you don't actually receive the cash until Dec 31 Therefore, the correct answer is (3) Dr. Interest Receivable 80 Cr. Interest Revenue 80

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