On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793.
- The journal entry to record the issuance of the bond is:
A) Debit Bonds Payable $400,000; debit Bond Interest Expense $16,207; credit Cash $416,207.
B) Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable $400,000.
C) Debit Cash $383,793; credit Bonds Payable $383,793.
D) Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable $400,000.
E) Debit Cash $400,000; credit Discount on Bonds Payable $16,207; credit Bonds Payable $416,207.

Question

Quizplus · Accepted Answer

The bonds are issued at a discount because the market rate (8%) is higher than the contract rate (7%). The cash received is $383,793, and the bonds payable is $400,000, resulting in a discount of $16,207.

On January 1, a Company Issues Bonds Dated January 1