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On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.

-Which of the following shows the effect of the bond issuance on January 1,Year 1?

A)Option A
B)Option B
C)Option C
D)Option D

Question

[The following information applies to the questions displayed below.]

On January 1, Year 1, Pierce Corporation issued $25,000 in 8%, 5-year bonds payable at 102. Interest payments are due each December 31. Pierce uses the straight-line method to amortize bond discounts and premiums.

-Which of the following shows the effect of the bond issuance on January 1,Year 1?

A)Option A 
B)Option B 
C)Option C 
D)Option D

Quizplus · Accepted Answer

Issue price = Face value of $25,000 × 102% = $25,500
Premium = Issue price of $25,500 -Face value of $25,000 = $500
The bond issuance increases assets (cash)by $25,500
It also increases liabilities (bonds payable)by $25,000 and also increase liabilities (premium on bonds payable)by $500,which equals a total increase in liabilities of $25,500.The proceeds are reported as a cash inflow for financing activities.

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