On January 1, Enviro Company issues $290,000 par value, 10%, 10-year bonds with semiannual interest payments. At a market rate of 12% (selling price 88 1/2), the journal entry involves debiting Cash for the selling price, crediting Bonds Payable for par value, and recognizing the difference as a Discount on Bonds Payable.
On January 1, when Enviro Company issues 10%, 10-year bonds with a par value of $290,000 and semiannual interest payments at an annual market rate of 12%, the selling price is 88 1/2 (or 88.5).
The journal entry for the issuance of the bonds for cash involves crediting Bonds Payable for the par value ($290,000), debiting Cash for the proceeds received (selling price * par value), and recognizing the difference as a Discount on Bonds Payable.
In this case, the discount is calculated as the difference between the par value and the selling price. This entry reflects the initial financial transaction associated with issuing the bonds at a market rate lower than the coupon rate.