A company issued 10-year bonds with a par value of $10,000,000 and an 8% annual

Question

A company issued 10-year bonds with a par value of $10,000,000 and an 8% annual face on January 2, 2010. The issue price of the bond issue was $9,933,198.50 which reflected an 8.1% effective interest rate. Required: a) Determine the effect on the accounting equation upon recording the interest paid to the bondholders on January 2, 2011. b) Determine the effect on the accounting equation upon recognizing the interest expense at December 31, 2011. Any premium or discount should be amortized using the effective interest rate method.

Explanation / Answer

A company issued 10-year bonds with a par value of $10,000,000 and an 8% annual face on January 2, 2010 a) Determine the effect on the accounting equation upon recording the interest paid to the bondholders on January 2, 2011.a) Interest expense .... Dr = 8% of $10 million = $800000
Cash... cr = $800000
b) Determine the effect on the accounting equation upon recognizing the interest expense at December 31, 2011.
b) Prepaid Interest ... Dr = $800000
Cash... Cr = $800000 Any premium or discount should be amortized using the effective interest rate method.yes

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