Question

On January 1, Parson Freight Company issues 7%, 10-year bonds with a par value of $2,000,000. The bonds pay interest semiannually. The market rate of interest is 8% and the bond selling price was $1,864,097. The bond issuance should be recorded as: Multiple Choice Debit Cash $2,000,000; credit Bonds Payable $2,000,000. Debit Cash $1,864,097; credit Bonds Payable $1,864,097. Debit Cash $2,000,000; credit Bonds Payable $1,864,097; credit Discount on Bonds Payable $135,903. Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable $2,000,000. Debit Cash $1,864,097; debit Interest Expense $135,903; credit Bonds Payable $2,000,000.

Answer 1

Answer:

The correct option is Debit Cash $1,864,097; debit Discount on Bonds Payable $135,903; credit Bonds Payable $2,000,000.

Explanation:

This question is an instance of bonds issued at a discount. This happens when a bond is issued below the face value of the bond and also happens when the coupon rate on the bond payable is less than the market rate.

The face value of the bond payable is $2,000,000 while the market value is $1,864,097, so there is a discount of $2,000,000 - $1,864,097 = $135,903 on the bond payable, which is to be amortized over the life of the bond payable.

So, the appropriate journals to record this transaction is as provided above.