Question

Crop Corporation (with a December 31 year-end) issued $452,000, 8% bonds due in 10 years on May 1, 2018. Interest is paid semi-annually on October 31 and April 30 of each year. On the issuance date, the market rate of interest was 7%, resulting in a price of $484,200 for these bonds. The premium/discount is amortized using the straight line amortization method. Do not enter dollar signs or commas in the input boxes. Round your answers to the nearest whole number. For transactions with more than one debit or credit, enter the accounts in alphabetical order. Is this bond issued at a discount or at a premium?: Answer Prepare the journal entry on May 1, 2018, to issue the bonds. Date Account Title and Explanation Debit Credit May 1 Answer Answer Answer Answer Answer Answer Issued bonds

Answer 1

The bond is issued at a premium, with a journal entry including a debit to Cash for $484,200, a credit to Bonds Payable for $452,000, and a credit to Premium on Bonds Payable for $32,200.

Step-by-step explanation:

The bond issued by Crop Corporation is sold at a premium because the sale price of $484,200 is higher than the face value of $452,000. This premium occurs since the bonds' stated interest rate of 8% is higher than the market rate of 7% at the time of issuance. To prepare the journal entry on May 1, 2018, we record the following:

1. Debit Cash for $484,200.
2. Credit Bonds Payable for the face value of $452,000.
3. Credit Premium on Bonds Payable for the difference of $32,200.

The premium represents the amount above the face value of the bonds and is amortized over the life of the bond, which would reduce the amount of interest expense recorded each period. In straight-line amortization, this amount is divided equally over each interest payment period.