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On January 1 Year 1, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums.

-Which of the following shows the effect of the bond issuance on the elements of the financial statements?

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, Gordon Corporation issued bonds with a face value of $70,000, a stated rate of interest of 6%, and a 5-year term to maturity. The bonds were issued at 98. Interest is payable in cash on December 31 each year. Gordon uses the straight-line method to amortize bond discounts and premiums.

-Which of the following shows the effect of the bond issuance on the elements of the financial statements?

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

Quizplus · Accepted Answer

Proceeds from issuance = Face value of $70,000 × 98% = $68,600
Discount = Face value of $70,000 - Proceeds of $68,600 = $1,400
The bond issuance increases assets (cash)by $68,600.It increases liabilities (bonds payable)by $70,000 and decreases liabilities (by increasing discount on bonds payable)by $1,400,for a net increase in liabilities of $68,600.The cash proceeds of $68,600 are reported as a cash inflow for financing activities on the statement of cash flows.

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