On January 1, Year 1, Residence Company issued bonds with a $50,000 face value. The bonds were issued at face value. They had a 20 year term and a stated rate of interest of 7%. What shows how the bond issue will affect Residence’s financial statements on January 1, Year 1?

The impact on the financial statement is summarized as follows

A net cash position of 50,000 -3500 = 35,000

Bond liability        =                                 50,000

An increase in expense of 3,500 which implies that profit would reduce by $3,500

Explanation:

The impact on Residence's financial statements would be seen in two forms;

Issuance of bonds

The effect of the  debt issuance would be on cash asset and long-term liabilities. This is described below in the accounting entries:

                                                    Debit                          Credit

Cash                                             $50,000

Bond liabilities                                                                       $50,000

Being the issuance of bonds

Interest payment

The interest payment on the bonds equals

Coupon rate × par Value ×

interest payment = 7%× 50,000 = $3,500

The accounting entry to record the interest payment each time payment is made would be:

                                                    Debit                          Credit

Bond Interest Expense            $3,500

Cash                                                                             $3,500

Being  interest payment on bonds

The impact on the financial statements is summarized as follows

A net cash position of 50,000 -3500 = 35,000

Bond liability        =                                 50,000

An increase in expense of 3,500 which implies that profit would reduce by $3,500

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