Question

On November​ 1, 2018, Arch Services issued $ 331 comma 000of eightminusyearbonds with a stated rate of 14​%at par. Interest payments occur each April 30 and October 31. On December​ 31, 2018, Arch made an adjusting entry to accrue interest at yearminusend.What is the amount of Interest Expense that will be recorded on December​ 31, 2018?​ (Do not round any intermediate​ calculations, and round your final answer to the nearest​ dollar.)

Answer 1

Arch Services

Interest Expense as at December 31:

Step-by-step explanation:

a) Computation of Interest Expense:

Interest per annum = $331,000 x 14% = $46,340

Interest per month = $3,861.66667 ($46,340/12)

Interest for two months = $7,723 ($46,340/12) x 2

b) Interest on bonds is usually paid monthly, quarterly, semi-annually, or yearly. In this example, the interest is payable every six months, on April 30 and October 31. However, as the year ends on December 31, there is need to accrue interest expense for the period, in line with the accrual concept and matching principle of generally accepted accounting principles. These require that expenses are accrued for the period for which they are incurred and matched to the revenue that they produced whether payment was made or not for them.