Question

On the first day of the fiscal year, a company issues a $940,000, 9%, 5-year bond that pays semiannual interest of $42,300 ($940,000 x 9% × 1/2), receiving cash of $884,174. Journalize the entry for the issuance of the bonds.

Answer 1

Journalizing the bond issuance involves debiting Cash for the amount received ($884,174), debiting Discount on Bonds Payable for the discount on the bond issue ($55,826), and crediting Bonds Payable for the bond's face value ($940,000).

Step-by-step explanation:

When a company issues a bond, it is effectively borrowing money from investors who become bondholders. The bond issuance involves the company receiving a sum of money upfront in exchange for promising to pay back the principal amount on the maturity date, along with periodic interest payments. In the scenario presented, the company has issued a $940,000 bond with a 9% semiannual interest rate over a 5-year period. The interest amount payable every six months is $42,300. However, the cash received on issuance is $884,174, which is less than the face value of the bond; this difference indicates that the bond was sold at a discount, possibly because the market interest rates were higher than the bond's coupon rate at the time of issuance.

To journalize the bond issuance, the entry would be:

Debit Cash $884,174

Debit Discount on Bonds Payable $55,826

Credit Bonds Payable $940,000

The Discount on Bonds Payable represents the difference between the face value of the bond and the cash received, and it is amortized over the life of the bond.