Question

legacy issues $550,000 of 9.5%, four-year bonds dated january 1, 2021, that pay interest semiannually on june 30 and december 31. they are issued at $507,301 when the market rate is 12%. required: 1. prepare the january 1 journal entry to record the bonds' issuance.

Answer 1

The journal entry to record the issuance of Legacy's bonds on January 1 includes debiting cash for the amount received, debiting the discount on bonds payable for the difference between the face value and the cash received, and crediting bonds payable for the face value of the bonds.

Step-by-step explanation:

To prepare the January 1 journal entry to record the issuance of the bonds by Legacy, we must recognize the cash received and the bond payable at the value they were issued. As the bonds are issued at a discount (because the market rate of 12% is higher than the bond's coupon rate of 9.5%), the cash received is less than the face value of the bonds. The discount on bonds payable is considered a contra account to bonds payable and represents the difference between the cash received and the face value of the bond.

The journal entry on January 1, 2021, would be as follows:

• Debit Cash $507,301
• Debit Discount on Bonds Payable $(42,699)
• Credit Bonds Payable $550,000

Here, the discount on bonds payable is calculated as the difference between the face value of the bonds ($550,000) and the cash received ($507,301), which equals $42,699. This discount will be amortized over the life of the bonds.