Question

On January 1, 2012 Johnson Company issued bonds with a face value of $750,000. The bonds carry an interest rate of 8% payable each January 1.

Required:
a. Prepare the journal entry for the issuance assuming the bonds are issued at 96.
b. Prepare the journal entry for the issuance assuming the bonds are issued at 103.

Answer 1

a.

January 1 Cash 720000 Dr

Discount on Bonds Payable 30000 Dr

Bonds Payable 750000 Cr

b.

January 1 Cash 772500 Dr

Bonds Payable 750000 Cr

Premium on Bonds Payable 22500 Cr

Step-by-step explanation:

a.

When the bonds are issued at 96, this means that they are issued at 96% of the face value of the bond which is 750000 * 0.96 = 720000

So, the cash received from issuing the bonds is 720000. As the face value of the bonds is 750000 which will be recorded as bonds payable, the difference between the cash received and the face value is the discount amount which will be debited.

b.

When the bonds are issued at 103, this means that they are issued at 103% of the face value of the bond which is 750000 * 1.03 = 772500

So, the cash received from issuing the bonds is 772500. As the face value of the bonds is 750000 which will be recorded as bonds payable, the difference between the cash received and the face value is the premium amount which will be credited.