Interest Payments and Interest Expense for Bonds (Straight Line) Swiss Inc. sold 20-year bonds with a total face amount of $401,000 and a stated rate of 7.5%. The bonds sold for $425,000 on January 1, 2024, and pay interest semiannually on June 30 and December 31. Required: 1. Prepare the entry to recognize the sale of the bonds. If an amount box does not require an entry, leave it blank. 2024 Jan. 1 88 (Record issuance of bonds at premium.) 2. Determine the amount of the semiannual interest payment required by the bonds. Round your answer to the nearest whole dollar and use the same in subsequent calculations. 3. Prepare the journal entry made by Swiss at June 30, 2024, to recognize the interest expense and an interest payment. If an amount box does not require an entr leave it blank. 2024 June 30 (Record interest expense.)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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**Interest Payments and Interest Expense for Bonds (Straight Line)**

Swiss Inc. sold 20-year bonds with a total face amount of $401,000 and a stated rate of 7.5%. The bonds sold for $425,000 on January 1, 2024, and pay interest semiannually on June 30 and December 31.

**Required:**

1. **Prepare the entry to recognize the sale of the bonds. If an amount box does not require an entry, leave it blank.**

   - **2024 Jan. 1**
     - Debit: ______
     - Credit: ______
     - Credit: ______

    *(Record issuance of bonds at premium.)*

2. **Determine the amount of the semiannual interest payment required by the bonds. Round your answer to the nearest whole dollar and use the same in subsequent calculations.**
   
   - Semiannual Interest Payment: $______

3. **Prepare the journal entry made by Swiss at June 30, 2024, to recognize the interest expense and interest payment. If an amount box does not require an entry, leave it blank.**
   
   - **2024 June 30**
     - Debit: ______
     - Debit: ______
     - Credit: ______
   
    *(Record interest expense.)*

4. **Determine the amount of interest expense for 2024.**
   
   - Interest Expense for 2024: $______

---

This guide walks through the step-by-step process of accounting for bond sales and the associated interest payments and expenses. Make sure to carefully fill in the journal entries and calculations as specified.
Transcribed Image Text:**Interest Payments and Interest Expense for Bonds (Straight Line)** Swiss Inc. sold 20-year bonds with a total face amount of $401,000 and a stated rate of 7.5%. The bonds sold for $425,000 on January 1, 2024, and pay interest semiannually on June 30 and December 31. **Required:** 1. **Prepare the entry to recognize the sale of the bonds. If an amount box does not require an entry, leave it blank.** - **2024 Jan. 1** - Debit: ______ - Credit: ______ - Credit: ______ *(Record issuance of bonds at premium.)* 2. **Determine the amount of the semiannual interest payment required by the bonds. Round your answer to the nearest whole dollar and use the same in subsequent calculations.** - Semiannual Interest Payment: $______ 3. **Prepare the journal entry made by Swiss at June 30, 2024, to recognize the interest expense and interest payment. If an amount box does not require an entry, leave it blank.** - **2024 June 30** - Debit: ______ - Debit: ______ - Credit: ______ *(Record interest expense.)* 4. **Determine the amount of interest expense for 2024.** - Interest Expense for 2024: $______ --- This guide walks through the step-by-step process of accounting for bond sales and the associated interest payments and expenses. Make sure to carefully fill in the journal entries and calculations as specified.
### Understanding Bond Market Dynamics

**Question 5: Conceptual Connection**

If Swiss issued bonds with a variable interest rate, would you expect the market rate of interest (i.e., yield) to increase, decrease, or stay the same?

**Answer Options:**
- Dropdown selection for students to choose their answer.

---

**Explanation:**

This question encourages students to think critically about the relationship between bond issuance and market interest rates. Bonds with variable interest rates, also known as floating-rate bonds, adjust the interest payout based on benchmark rates like the LIBOR or federal funds rate. Here’s a guide to help you understand how this might impact the market rate of interest:

### Key Concepts:

1. **Variable Interest Rate Bonds:** These bonds have interest payments that fluctuate based on an underlying benchmark interest rate or index. The rate adjustment usually occurs periodically, such as every month or quarter.

2. **Market Rate of Interest (Yield):** The yield of a bond in the market can be influenced by several factors including the benchmark interest rates, inflation expectations, and the general economic environment.

### Possible Outcomes:

- **Increase in Yield:** If investors perceive a higher risk in the economic environment, they might demand a higher yield even for variable interest rate bonds to compensate for the uncertainty.
  
- **Decrease in Yield:** If benchmark rates remain stable or decrease and the economic outlook is positive, the yields on these bonds might decrease as the risk premium reduces.
  
- **Stability:** In some situations, the market yield might remain unchanged if the variable rate bonds are perceived to adequately adjust to the prevailing economic conditions, balancing out the risk and return expectations of investors.

**Graphical Interpretation:**

While this specific question does not include a graph, discussing variable interest rates often involves understanding shifts in yield curves. A yield curve graph typically plots interest rates of bonds of the same credit quality but different maturities and is vital in interpreting market rate movements.

### Conclusion:

Students should consider macroeconomic factors and investor sentiment when deciding how variable interest rate bonds might impact the market rate of interest. Understanding these dynamics aids in making informed decisions in financial environments.
Transcribed Image Text:### Understanding Bond Market Dynamics **Question 5: Conceptual Connection** If Swiss issued bonds with a variable interest rate, would you expect the market rate of interest (i.e., yield) to increase, decrease, or stay the same? **Answer Options:** - Dropdown selection for students to choose their answer. --- **Explanation:** This question encourages students to think critically about the relationship between bond issuance and market interest rates. Bonds with variable interest rates, also known as floating-rate bonds, adjust the interest payout based on benchmark rates like the LIBOR or federal funds rate. Here’s a guide to help you understand how this might impact the market rate of interest: ### Key Concepts: 1. **Variable Interest Rate Bonds:** These bonds have interest payments that fluctuate based on an underlying benchmark interest rate or index. The rate adjustment usually occurs periodically, such as every month or quarter. 2. **Market Rate of Interest (Yield):** The yield of a bond in the market can be influenced by several factors including the benchmark interest rates, inflation expectations, and the general economic environment. ### Possible Outcomes: - **Increase in Yield:** If investors perceive a higher risk in the economic environment, they might demand a higher yield even for variable interest rate bonds to compensate for the uncertainty. - **Decrease in Yield:** If benchmark rates remain stable or decrease and the economic outlook is positive, the yields on these bonds might decrease as the risk premium reduces. - **Stability:** In some situations, the market yield might remain unchanged if the variable rate bonds are perceived to adequately adjust to the prevailing economic conditions, balancing out the risk and return expectations of investors. **Graphical Interpretation:** While this specific question does not include a graph, discussing variable interest rates often involves understanding shifts in yield curves. A yield curve graph typically plots interest rates of bonds of the same credit quality but different maturities and is vital in interpreting market rate movements. ### Conclusion: Students should consider macroeconomic factors and investor sentiment when deciding how variable interest rate bonds might impact the market rate of interest. Understanding these dynamics aids in making informed decisions in financial environments.
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