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 Cash $400,000; debit Discount on Bonds Payable $16,207; credit Bonds Payable $416,207.
B) Debit Cash $383,793; debit Discount on Bonds Payable $16,207; credit Bonds Payable $400,000.
C) Debit Bonds Payable $400,000; debit Interest Expense $16,207; credit Cash $416,207.
D) Debit Cash $383,793; debit Premium on Bonds Payable $16,207; credit Bonds Payable $400,000.
E) Debit Cash $383,793; credit Bonds Payable $383,793.

Question

Quizplus · Accepted Answer

The amount of cash received in the sale of the bonds is $383,793, not the par value of $400,000. This means that there is a discount on the bonds because the market rate is higher than the contract rate. The discount is calculated as the difference between the par value and the sale price, which is $16,207. Therefore, the journal entry would be to debit Cash for $383,793, debit Discount on Bonds Payable for $16,207, and credit Bonds Payable for $400,000.

On January 1, a Company Issues Bonds Dated January 1