Question

The restaurant chain for which La works as an accountant sold a 20-year bond issued at a discount of $120,000. La is preparing to make adjusting entries at the end of the first year after the sale. The bond's total life is _____ months, and La needs to amortize _____ over its life.

1) 240; $120,000
2) 240; $60,000
3) 120; $120,000
4) 20; $120,000

Answer 1

The lifetime of the 20-year bond is 240 months, and the total discount of $120,000 must be amortized over that period in La's adjusting entries. The correct answer is option 1).

Step-by-step explanation:

The restaurant chain for which La works as an accountant sold a 20-year bond issued at a discount of $120,000. To account for the bond, La will spread the discount amount over the life of the bond through a process called amortization. The total life of the bond is 240 months (20 years x 12 months per year), and La needs to amortize the full discount of $120,000 over its life.

The bond's total life is 240 months, and the discount amount of $120,000 needs to be amortized over its life. To record this in the company's financial statements, La would make adjusting entries each year to incrementally recognize the bond discount as an expense, reducing it until it reaches zero when the bond matures.