Question

Cullumber Company has issued three different bonds during 2019. Interest is payable annually on each of these bonds. 1. On January 1, 2019, 1,000, 6%, 5-year, $1,000 bonds dated January 1, 2019, were issued at face value. 2. On July 1, $700,000, 7%, 5-year bonds dated July 1, 2019, were issued at 101. 3. On September 1, $200,000, 5%, 5-year bonds dated September 1, 2019, were issued at 97. Prepare the journal entries to record each bond transaction at the date of issuance.

Answer 1

Answer:

1.

January 1, 2019,

Dr. Cash                 $1,000,000

Cr. Bond Payable   $1,000,000

2.

July 1,

Dr. Cash                      $707,000

Cr. Premium on Bond $7,000

Cr. Bond Payable        $700,000

3.

September 1,

Dr. Cash                      $194,000

Cr. Discount on Bond $6,000

Cr. Bond Payable        $200,000

Explanation:

1.

As the bond is issued at the face value, $1,000,000 cash will be received, So cash account will be debited by $1,000,000 and Bond Payable account will be credited because it is a liability account.

2.

When the Bond is issued on the price more than its face value, the exptra amount from face value received is called Bond Premium.

Cash Proceed = $700,000 x 101% = $707,000

Premium = $707,000  - $700,000 = $7,000

Bond Liability = $700,000

3.

The bond is issued on discount when the bond issuance proceeds are less than the face value of the bond.

Cash Proceed = $200,000 x 97% = $194,000

Discount = $200,000  - $194,000 = $6,000

Bond Liability = $200,000