On Jan ty 1 Parson Freight Company issues 75% 10-year bonds with a par value of

Question

On Jan ty 1 Parson Freight Company issues 75% 10-year bonds with a par value of S3100 000 The bonds pay interest sem annually The market' te of interests 85% and the bond seing price was $2.889,352 The bond issuance should be recorded as Debit Cash $3300000, credt Bonds Poyable $3100,000 Debit Cash $2.889352 credit Bonds Payble $2.889352 Debt Cesh $3,100.000 credt Bonds Peyable $2.889,352 credt Discount on Bonds Peyable $210 ,648 Deb Cash $2.889 352 debt Discoune on Bonds Payable $210648 cret Bonds Poyable S3 00000 Net 8 7 Alt

Explanation / Answer

Correct Answer (D) Debit cash $ 2889352, Debit Discount on bonds Payable $ 210648 and Credit Bonds Payable $ 3100000.

Explanation

Following Journal Entry will be made

Cash                                                                      $ 2889352

Discount on Bonds Payable                         $ 210648

                 Bonds Payable                                                                 $3100000

(Bonds issued at discount)

This is because bonds have a lower interest rate than the market interest rate. When market rate of interest is higher than bond’s interest rate, the price of bond decreases.                                          

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