On January 1, the first day of the fiscal year, a company issues a $1,800,000, 4%, five-year bond that pays semiannual interest of $36,000 ($1,800,000 x 4% x 1/2), receiving cash of $1,992,170.
Journalize the bond issuance.
When a bond's interest rate exceeds that of the market, the bond is more attractive to investors as an investment instrument. Thus, investors are willing to pay a premium price for the bonds. This premium is recorded on the bond's issuance date and is amortized over the bond's life.
Answer and Explanation:
|Cash||$1,992,170||Record inflow of cash from issuance|
|Bonds Payable||$1,800,000||Record bonds payable at face value|
|Premium on Bonds Payable||$192,170||Record amount received in excess of face value ($1,992,170 - $1,800,000)|
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from Financial Accounting: Help and ReviewChapter 8 / Lesson 7