Question

On July 1, Mark Company, issued $3,000,000 of 10-year, 8 percent bonds at par. Interest on the bonds is payable semi-annually on December 31 and June 30. On payment of interest, net assets of the company - (a) Decrease by $120,000; (b) Increase by $240,000; (c) Decrease by $150,000; or (d) Remain unaffected

Also explain why?

Answer 1

Answer :- Option (a). Decrease by $120,000.

Explanation :- Journal entry (for payment of interest on bond)

Date	General journal	Debit ($)	Credit ($)
Dec. 31	Bond interest expense A/c Dr. To Cash A/c (3000000 * 8 % * 6 / 12)	120000	120000

Accordingly, Net assets of Mark Company will decrease by $ 120000 as there will be outflow of cash (decrease in the current asset forming the part of Net assets) of the Mark Company.

Note :- Net assets of the Mark company have been evaluated on December 31 (in the given question) after paying the half-yearly interest expense on the bond (on Dec. 31).