Question

On November​ 1, 2018, Arch Services issued $ 337 comma 000 of eight minus year bonds with a stated rate of 15​% at par. Interest payments occur each April 30 and October 31. On December​ 31, 2018, Arch made an adjusting entry to accrue interest at yearminusend. What is the amount of Interest Expense that will be recorded on December​ 31, 2018

Answer 1

Answer:

Interest expense to be recorded on Dec 31 2018= $8425

Explanation:

Lets first understand what adjusting entry is? Adjusting entries are entries passed at the reporting date in order to comply to the accruals concept of accounting. Accruals concept requires entities to record revenue and expenses in the period that they occur and should not wait until they are received or paid respectively. Revenues and expenses should be matched for the period and recorded.

Now that we have understood adjusting entry, lets calculate interest expense that should be recorded on December 31 2018. So Arch Services records interest payment on a semi-annul basis (i.e every 6 months). Now the bonds are issued on November (i.e two months to the reporting date), considering the accruals concept Arch Services will have to record interest for two months.

The interest expense is calculated as follows:

Annual Interest= $337000×15%

Annual Interest= $50550

Lets convert it into monthly basis as follows:

Monthly interest expense= $4212.5

Interest for two months would be = $4212.5×2

Interest expense to be recorded on Dec 31 2018= $8425