Question

E10-7 Preparing Journal Entries to Record Issuance of Bonds and Payment of Interest [LO 10-3] On January 1, Applied Technologies Corporation (ATC) issued $500,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 10 percent. When the bonds were issued, the market interest rate was 10 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

1. Determine the price at which the bonds were issued and the amount that ATC received at issuance.

Since the bond's coupon rate was 10% and the market interest rate was also 10%, then the bonds should have been sold at face value = $500,000 and that is the amount that ATC should have received.

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.

January 1, bonds were issued:

Dr Cash 500,000

Cr Bonds payable 500,000

January 31, coupon is paid:

Dr Interest expense - bonds payable 50,000

Cr Cash 50,000