On January 1,Parson Freight Company issues 7%,10-year bonds with a par value of $2,000,000.The bonds pay interest semiannually.The market rate of interest is 8% and the bond selling price was $1,864,097.The bond issuance should be recorded as:
A)Debit Cash $2,000,000; credit Bonds Payable $2,000,000.
B)Debit Cash $1,864,097; credit Bonds Payable $1,864,097.
C)Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds Payable $135,903.
D)Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable $2,000,000.
E)Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.

Question

Quizplus · Accepted Answer

The correct entry records the cash received ($1,864,097), the discount on bonds payable as the difference between the par value and the cash received ($135,903), and the bonds payable at their par value ($2,000,000). This reflects that the bonds were sold at a discount because the market interest rate was higher than the coupon rate.

On January 1,Parson Freight Company Issues 7%,10-Year Bonds with a Par