The Reagan Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2011, at 95. The journal entry to record the issuance will show a
A) credit to Discount on Bonds Payable for $50,000.
B) debit to Cash of $1,000,000.
C) credit to Bonds Payable for $1,000,000.
D) credit to Cash for $950,000.

Question

Quizplus · Accepted Answer

When the Reagan Corporation issues 1,000 bonds at $1,000 per bond, the total issuance amount will be $1,000,000. However, since the bonds are sold at a discount (95), the net cash received will be $950,000 (1,000,000 x 0.95). Therefore, the journal entry to record the issuance will include a debit to Cash for $950,000 and a credit to Bonds Payable for $1,000,000. There is no need to record a discount on bonds payable or expense it in this case because the discount is already factored into the effective interest rate (8%).

The Reagan Corporation Issues 1,000, 10-Year, 8%, $1,000 Bonds Dated