On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177.
-The journal entry to record the issuance of the bond is:
A) Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177.
B) Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000.
C) Debit Cash $312,177; credit Bonds Payable $312,177.
D) Debit Bonds Payable $300,000; debit Bond Interest Expense $12,177; credit Cash $312,177.
E) Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000.

Question

On January 1, a company issues bonds dated January 1 with a par value of $300,000. The bonds mature in 5 years. The contract rate is 9%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $312,177. 
-The journal entry to record the issuance of the bond is:
A) Debit Cash $300,000; debit Premium on Bonds Payable $12,177; credit Bonds Payable $312,177.
B) Debit Cash $312,177; credit Discount on Bonds Payable $12,177; credit Bonds Payable $300,000.
C) Debit Cash $312,177; credit Bonds Payable $312,177.
D) Debit Bonds Payable $300,000; debit Bond Interest Expense $12,177; credit Cash $312,177.
E) Debit Cash $312,177; credit Premium on Bonds Payable $12,177; credit Bonds Payable $300,000.

Quizplus · Accepted Answer

The bonds were sold at a premium because the market rate is lower than the contract rate. The cash received is $312,177, which is more than the par value of $300,000, resulting in a premium of $12,177.

On January 1, a Company Issues Bonds Dated January 1