The entry to record the issue of $4.02 million bonds by Wildhorse Corp. on July 1, 2024, includes debiting Cash for $4,348,664, crediting Bonds Payable for $4,020,000, and crediting Premium on Bonds Payable for $328,664.
You asked about the journal entry to record the issue of bonds by Wildhorse Corp. on July 1, 2024, when they issued $4.02 million of 10-year, 5% bonds at a price of $4,348,664 to yield a 4% market interest rate.
The entry to record this transaction would be:
- Debit Cash $4,348,664
- Credit Bonds Payable $4,020,000
- Credit Premium on Bonds Payable $328,664
This reflects the receipt of cash and the creation of a liability for the amount borrowed. The premium on bonds payable represents the additional amount over the face value for which the bonds were sold, due to the lower market interest rate compared with the coupon rate.
It's worth noting that the bond pricing is based on the prevailing market interest rate. Bonds issued at a price above their face value (a premium) occur when the coupon rate is higher than the market rate at the time of issuance.