Question

On January 1, Applied Technologies Corporation (ATC) issued $550,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 12 percent. When the bonds were issued, the market interest rate was 12 percent. The bonds pay interest once per year on December 31.
Required:
1. Determine the price at which the bonds were issued and the amount that ATC received at issuance.

2. & 3. Prepare the required journal entries to record the bond issuance and the first interest payment on December 31 assuming no interest has been accrued earlier in the year.

Answer 1

Answer:

1. $550,000

Explanation:

1. It is given in the question that the stated interest rate and the market interest rate both are having the same rate, i.e, 12%.

Hence, the bonds are issued at the face value that is $550,000.

2. The Journal entries are as follows:

(i) On January 1,

Cash A/c      Dr. $550,000

To bonds payable               $550,000

(To record the bond issuance)

(ii) On December 31,

Interest Expense A/c   Dr.   $66,000

To cash A/c                                          $66,000

(To record the first interest payment on December 31 assuming no interest has been accrued earlier in the year)

Workings:

Interest expense = $550,000 × 12%

                             = $66,000