Question

Problem 10-4A (Part Level Submission) On October 1, 2016, Ayayai Corp. issued $732,000, 8%, 10-year bonds at face value. The bonds were dated October 1, 2016, and pay interest annually on October 1. Financial statements are prepared annually on December 31.

Answer 1

At year end 2016, Ayayai Corp. will accrue interest expense of $14,640.

Step-by-step explanation:

On October 1, 2016, Ayayai Corp. will make the following entries on the issuance of bond:

Dr. Cash $732,000

Cr. Bond payable $732,000

However, at the end year at December 31, Ayayai Corp. will take into account the "Interest expense" accrued (Not paid yet) for the past three months: October, November, and Dec

Following will be the journal entries for it:

Dr. Interest Expense $14,640*

Cr. Interest Payable $14,640

* The calculation of past 3 months interest expense:

Monthly interest expense = ($732,000 x 0.08)/12 => $4,880

The cumulative interest expense for 3 months= 3 x $4,880 = $14,640