help with understanding this question

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    Topic
  • #202551
    jorden_rowrow
    Participant

    On January 1, Year 2, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, Year 1, and mature on October 1, Year 11. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, Year 1 to January 1, Year 2, amounted to $8,000. On January 1, Year 2, what amount should Oak report as bonds payable, net of discount?

    The answer is 388,000. I was wondering why don’t you add the 8000 because aren’t you suppose to add the accrued interest? I know the wording has to do with the question but I just can’t see it

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  • #780204
    Anonymous
    Inactive

    The $8,000 would be interest payable on the bonds, not bonds payable. When you pay the interest, you don't reduce the bonds payable obligation.

    #780205
    wombataholic
    Participant

    It's a trickily-worded question. Try looking at the journal entry to record the issue of bonds:

    Debit Cash 396,000
    Debit Discount on BP 12,000

    Credit Bonds Payable 400,000
    Credit Interest Payable 8,000

    The question asks for the balance of bonds payable, net of discount. Since the interest received isn't a part of either account, it isn't factored into the answer.

    Licensed CPA
    Passed each section on the first try with Ninja Notes/MCQ/Audio

    #780206
    Kelleyzt32
    Participant

    This question has a lot of information that is meant for distraction. Simple multiply $400,000 by .97 to get the discounted bond payable.

    REG - 91
    FAR - 86
    BEC - 84
    AUD - July 2016

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