On January 1, 2017, Garzon purchased 6% bonds issued by PBS Utilities at a cost of $40,000, which is their par value. The bonds pay interest semiannually on July 1 and January 1. For 2017, prepare entries to record Garzon's July 1 receipt of interest and its December 31 year-end interest accrual. (Do not round your intermediate calculations.)

July 1st: Debit Cash=$1,200 Credit Interest Received=$1,200

December 31st: Debit Interest Receivable=$1,200, Credit Interest Earned = $1,200

Explanation:

July 1st Receipt of Interest

Step 1: Calculate Interest Receivable for the entire Year

= ($40,000*6%) = 40,000*0.06 = $2,400

=$2,400

Step 2: Calculate Interest Receivable for the first 6 months (Semi-annual Payment)

January 1st to July 1st is 6 Months, we therefore divide the annual interest receivable into 2

$2,400:2=$1,200

Step 3: Entries for the July 1 Receipt of Interest

Debit Cash = $1,200

Credit Interest Received=$1,200

Step 4: Calculate the Interest Accrual for the Decembe 31st

Between July 1st and December 31st is equally 6 months, therefore, the remaining $1,200 is for the second half of the year.

Step 5: Entries for December 31st Interest Accrual

Debit Interest Receivable = $1,200

Credit Interest Earned = $1,200