Ask Me Help Desk - Adjusting Entry

Quote:

Originally Posted by Quirkyburd

Aug 1 06 JRS purchases 18 1k 12% bonds maturing on Jul 31 07. Interest payments are due jan and jul 31.

I have to prepare an adjusting entry for this event for the year ending 2006. Is this an annuity? Do I have to find the future value and then multiple that by the fraction of 2006 it existed in?

I think that you need to know how much is interest pay each payment, then divided the amount by six that would give you the interest pay per month, the multiply by 5 that would cover from Aug 1 to Dec 31, and you will recorded as a debit to interest expense and credit to interest payable. And then in January when you actually do the payment you will debit interest payable for what your interest is from aug 1 to dec 31, debit interest expense for what January interest should be, then credit cash by the total interest that is paid each period.
then 18 x 1,000= $18,000 x 0.06= $1,080 per period
1,080 / 6 = 180
180 x 5= $900
year ending 2006
Dr. Interest Expense... 900
Cr. Interest Payable... 900
on January when the payment is make
Dr. Interest Payable... 900
Dr. Interest Expense... 180
Cr. Cash... 1,080
Hope this could help you