Question

Enviro Company issues 10%, 10-year bonds with a par value of $330,000 and semiannual interest payments. On the issue date, the annual market rate for these bonds is 12%, which implies a selling price of 88 1/2. Prepare the journal entry for the issuance of the bonds for cash on January 1.

Answer 1

Answer:

cash                 292,050 debit

discount on BP   37,950 debit

         bonds payable    330,000 credit

Explanation:

par value $330,000

issuance selling price 88 1/2 = 88.5% of face value

$330,000 x 88.5% = $292,050

As it is being issued below par value we have a discount for $ 37,950

Overtime the company will adjust the carrying value of the bonds until it matches the face value at maturity.