From what I understand, when a company is selling the bonds interperiod, it collects the cash for the accrued interest, which it will pay back at the normal interest date.

Bond:

Cash                                388000

Discount on B/P                22000

             B/P                                   400000

Interest:

Cash                                8000

             I/P                                    8000 

Please correct me if I'm wrong.

Bond Payable is entered at the Face value. (400 x 1000)  $400,000

Discount on the Bond was (3% x 400,000)  $12,000

Net Bond Payable is ($400,000 - $12,000) = $388,000

The Bond was issued on 1/1/94 and they were asking what the balance was immediately after the issue on 1/1/94. If they were asking for a later date, then we would have to amortize the Bond discount so the bond payable account would be a little closer to the Face value. We're amortizing the dicount to Unitil October 2003 till the Bond Payable is at Face Value of $400,000.