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On January 1, the first day of the fiscal year, a company issues a $1,800,000, 4%, five-year bond...

Question:

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.

Bond Premium:

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:

Account Debit Credit 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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