Question

Cullumber Company issues $370,000, 20-year, 7% bonds at 102. Prepare the journal entry to record the sale of these bonds on June 1, 2022. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Account Titles and Explanation Debit Credit

Enter an account title enter a debit amount enter a credit amount
Enter an account title enter a debit amount enter a credit amount
Enter an account title enter a debit amount enter a credit amount

Answer 1

Cullumber Company issues bonds above face value, creating a journal entry with cash debited for the received amount and bonds payable along with premium on bonds payable credited for the face and premium amounts respectively.

Step-by-step explanation:

When Cullumber Company issues bonds at a premium (102 means they are issued at 102% of face value), the company receives more cash than the face value of the bonds. The journal entry to record this transaction increases cash and increases bonds payable (a liability) for the face value of the bonds, and also records a premium on bonds payable for the amount received over the face value.

Here's the entry on June 1, 2022:

• Cash: $370,000 x 102% = $377,400 (Debit)
• Bonds payable: $370,000 (Credit)
• Premium on bonds payable: $377,400 - $370,000 = $7,400 (Credit)

In the company's ledger, this entry would look as follows:

• Debit: Cash $377,400
• Credit: Bonds Payable $370,000
• Credit: Premium on Bonds Payable $7,400

The premium represents the additional amount investors are willing to pay for the bonds above their face value, likely due to the coupon rate being higher than the current market rate, making these bonds more attractive.