When dealing with face value bonds, calculating interest expense is straightforward. The interest expense corresponds directly to the cash amount paid for interest. For instance, if a company issues $50,000 in bonds with a 9% interest rate, the annual interest can be calculated by multiplying the principal amount by the interest rate:

Annual Interest = Principal Amount × Interest Rate

In this case:

Annual Interest = $50,000 × 0.09 = $4,500

This amount represents the yearly interest payment. However, since interest is paid semi-annually, the company will make journal entries every six months. Therefore, the semi-annual interest payment is half of the annual interest:

Semi-Annual Interest = Annual Interest ÷ 2

So:

Semi-Annual Interest = $4,500 ÷ 2 = $2,250

On July 1, after six months, the company will pay $2,250 in cash. The journal entry for this transaction will involve debiting the interest expense and crediting cash:

Journal Entry:

Debit Interest Expense: $2,250
Credit Cash: $2,250

This entry reflects the cash outflow for interest, which is also recognized as an expense on the income statement. The interest expense reduces the company's equity, as expenses lower net income. Thus, the interest expense of $2,250 will decrease equity by the same amount, ensuring that the accounting equation remains balanced.

In summary, for face value bonds, the interest expense is simply the cash paid for interest, calculated based on the principal and the stated interest rate, adjusted for the payment frequency. This straightforward approach simplifies the accounting process for interest payments.

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