Question

On January 1, a company issues bonds dated January 1 with a par value of $400,000. The bonds mature in 5 years. The contract rate is 7%, and interest is paid semiannually on June 30 and December 31. The market rate is 8% and the bonds are sold for $383,793. The journal entry to record the issuance of the bond is:

Answer 1

The journal entry to record the issuance of the bond is:

Debit Cash $383,793

Debit Discount on bonds payable $16,207

Credit Bonds payable $400,000

(To record the issuance of the bond)

Step-by-step explanation:

The discount on bonds payable is the difference between the par value and the issue price, that is: $400,000 - $383,793 = $16,207.

The bonds payable is always stated at the par value ($400,000). However, the difference between the par value and the issue price is regarded as premium or discount. At the instance of the question, we have a discount of $16,207.