Final answer:
The journal entry to record the issuance of bonds will always include a debit to cash and a credit to bonds payable, reflecting the obligation to repay the borrowed amount at maturity regardless of whether the bonds are issued at face value, discount, or premium.
Step-by-step explanation:
No matter whether bonds are issued at face value, at a discount, or at a premium, the journal entry to record the issuance of bonds will always include certain elements.
Bonds are essentially debt securities under which the issuer owes the holders a debt and, depending on the terms of the bond, is obligated to pay interest, which is typically known as the coupon. At the maturity date, the debt is repaid.
When a company issues bonds to raise capital, it makes a promise to pay back the face value of the bond at maturity along with periodic interest payments. For example, when bonds are issued at face value and interest rates are at 5%, a $1,000 bond will generate an annual coupon payment of $50 to the bondholder.
If market interest rates fluctuate, the attractiveness of the bond to investors will also change, affecting the trading price, but not the bond's face value or coupon payments.
The accounting entry to record bond issuance always includes a debit to cash and a credit to bonds payable, which represents the amount the company must repay at the maturity of the bonds.
If bonds are issued at a discount, there will be a debit to cash for the amount received, a debit to discount on bonds payable for the difference between the face value and the cash received, and a credit to bonds payable for the face value of the bonds.
Conversely, if bonds are issued at a premium, there's a debit to cash for the amount received, and a credit to both bonds payable for the face value of the bonds and premium on bonds payable for the amount received in excess of the face value.