If a bond interest payment period
does not coincide with the issuing company’s accounting period,
an accounting adjusting entry must be done to recognize bond interest
expense accruing since the most recent interest payment. For instance
assume from the effective interest example above that Backstreet Corp.
has an accounting year-end of April 30th 2009. Therefore in column B we
would have the following calculation:
Accrue
Bond Interest Expense up to April 30th, 2009 = $13,768.30 x 4/12
= $4,589.43
Accrue
Bond Premium Amortization = $1,231.70 x 4/12 = $410.60
The
resulting interest payable is $5000 + $410.60 = $5,410.60
Following is the accounting journal entry:
April
30th, 2009
Account Name
Debit
Credit
Dr. Bond
Interest Expense
$4,589.43
Dr. Premium on Bonds Payable
$410.60
Cr. Interest Payable
$5,000.03
Entry
to record accrual of bond interest payable by allocating $4,589.43
to bond interest expense and amortizing the premium on bonds payable
up to April 30th, 2009 (therefore 4 months in to 2009).
Similar journal entries to the above will be made on April
30th year-end throughout the three year life of the bonds.
On December 31st, 2009 when the actual $15,000 cash interest
is paid out, a journal entry is done to recognize bond interest expense
and amortization from May through December for a total of 8 months. This
journal entry also must eliminate the interest payable liability we booked
on April 30th, 2009 adjusting entry. The following is the entry made:
December
31st, 2009
Account Name
Debit
Credit
Dr. Interest
Payable
$5,000.03
Dr. Bond Interest Expense
($13,768.30 x 8/12)
$9,178.87
Dr.
Premium on Bonds Payable ($1,231.70 x 8/12)
$821.13
Cr. Cash
$15,000.03
Entry
to record eight months’ interest and amortization on bond
payable and eliminate the accrued interest liability recorded on
April 30th, 2009-07-16
