Assume that on 1 January 2019 the company issued $100 000 10-year bonds with a 10 per cent coupon rate paid semi-annually. The bond is issued to yield a 12 per cent return to investors selling for $88 529. Which of the following would be part of the journal entry on 1 January 2019?

Question

Quizplus · Accepted Answer

The bond is being sold at a discount, as the yield to investors is higher than the coupon rate. Therefore, the company will receive less than the face value of the bonds (in this case, $88 529 instead of $100 000). The difference between the face value and selling price is the discount on bonds, which is a contra-liability account. Therefore, the entry would be:

DR Cash $88 529
DR Discount on bonds $11 471
CR Bonds payable $100 000

Option B is incorrect because premium on bonds is used when the bond is sold at a premium (i.e. when the yield to investors is lower than the coupon rate). Option C and D are incorrect choices as the discount/premium is a contra-liability account and will be debited, not credited.

Assume That on 1 January 2019 the Company Issued $100