Question

Whitmore Company issued $549,500 of 5-year, 10% bonds at 95 on January 1, 2017. The bonds pay interest annually. Prepare the journal entry to record the issuance of the bonds. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

Answer:                                                                Debit            Credit

               Cash                                                      522025

               Discount on bonds payable              27475

                           Bonds Payable                                              549500

Explanation:

Bonds are issued but they are issued at 95% of its original price. This means that there is a 5% discount on the bonds issued. Because bonds were sold at 95% of its price, Whitmore will only receive $522025 (549500 x 95%) in cash. Cash is an asset, and increases on the debit side.

Bonds payable is a liability because this account states the amount that will be paid out to the bonds holder over time. Liabilities increase on the credit side, thus it is credited. This is recorded at its full value, because this account needs to show what the bonds are actually worth, regardless of discount.

The balancing figure is the discount received on the bonds, at 5%, which will thus be debited.