Question

Roger Technologies invests $50,000 to acquire $50,000 face value, 8%, five-year corporate bonds on January 2, 2017. The bonds will mature on January 2, 2022. The bonds pay interest semiannually on January 2 and July 2 each year until maturity. When Roger Technologies receives interest payments, how is the accounting equation affected?

Answer 1

Answer:

Assets (cash account) and equity (retained earnings) must increase.

Explanation:

The accounting equation is:

assets = liabilities + equity

When Roger Technologies receives an interest payment, their revenues increase, increasing their net income. When net income increases the retained earnings account must increase. Since the company received money, the cash account will increase.