Torrey Corporation issued $1,000,000 of ten-year, 10 percent bonds payable dated January 1, 2016. The market rate of interest at that time was 11 percent. The journal entry to record this transaction will include a:

Question

Quizplus · Accepted Answer

Since the market rate of interest is higher than the stated rate of interest of the bonds, the bonds will be issued at a discount. Therefore, the journal entry will include a debit to Discount on Bonds Payable. The credit to Cash is also correct since Torrey Corporation received $1,000,000 in cash for the issuance of the bonds. There is no need for a credit to Premium on Bonds Payable since the bonds are not being issued at a premium.

Torrey Corporation Issued $1,000,000 of Ten-Year, 10 Percent Bonds Payable