Question

on january 1, parson freight company issues 8.5%, 10-year bonds with a par value of $3,300,000. the bonds pay interest semiannually. the market rate of interest is 9.5% and the bond selling price was $3,075,762. the bond issuance should be recorded as:

Answer 1

To record the bond issuance, the company would debit Cash for the selling price, credit Bonds Payable for the par value, and credit Discount on Bonds Payable for the difference.

Step-by-step explanation:

The bond issuance should be recorded as follows:

• Debit: Cash ($3,075,762)
• Credit: Bonds Payable ($3,300,000)
• Credit: Discount on Bonds Payable ($224,238)

The company sells the bonds for a price less than their face value due to the market interest rate being higher than the coupon rate (8.5%). As a result, the company records a discount on bonds payable. The difference between the par value and the selling price represents this discount.