Question

Arizona Corporation issues term bonds with a face value of $800,000 on January 1, Year One. The bonds have a stated rate of interest of 7 percent per year and a life of six years. They pay interest annually on December 31. These bonds were issued at $695,470 to create an effective annual rate of 10 percent. a. What journal entry does the company make on January 1, Year One, when the bonds are issued? b. What journal entry or entries does the company make on December 31, Year One? c. What is the liability balance reported on the December 31, Year One, balance sheet? d. What journal entry or entries does the company make on December 31, Year Two? e. What is the liability balance reported on the December 31, Year Two, balance sheet?

Answer 1

Date	Particulars	Debit	Credit
1.1.2017	Cash A/c	$ 6,95,470.00
	Discount on Notes Payable A/c	$ 1,04,530.00
	Notes Payable A/c		$ 8,00,000.00
	(Cash received for notes payable)
31.12.2017	Interest Expenses A/c	$     17,421.67
	Interest Payable A/c		$     17,421.67
	(Interest accrued to be paid)
31.12.2017	Interest Payable A/c	$     17,421.67
	Cash A/c		$     17,421.67
	(Interest paid)
31.12.2018	Interest Expenses A/c	$       2,903.61
	Interest Payable A/c		$     17,421.67
	(Interest accrued to be paid)
31.12.2018	Interest Payable A/c	$     17,421.67
	Cash A/c		$     17,421.67
	(Interest paid)

Balance on 31.12.2017 would be $ 695470+$17421.67 = 712891.67

Balance on 31.12.2018 would be $ 712891.67 + $17421.67 = $730313.34