aestion Help Right Track Company sells SS00000 of 9%, 20-year bonds for 56.6886

Question

aestion Help Right Track Company sells SS00000 of 9%, 20-year bonds for 56.6886 on Apri 1, 2016. The maket ate of int rest on that day is 165%Interest is paid each year on Api 1. Teotry to record the sale of the bonds on April 1 would be as follows: (Intermediary and final answer calculations are rounded to the nearest whole number.) OA Cash 283,443 216,557 Discount on Bonds Payable Bonds Payable 500,000 B. Cash 500,000 Discount on Bonds Payable Bonds Payable 216,557 283,443 Oc. Cash 283,443 Bonds Payable 283,443 OD. Cash 500,000 Bonds Payable 500,000 Click to select your answer. MacBook Ai ??

Explanation / Answer

The right answer is option (a) The bonds are issued at discount i.e., Bond rate(9%) is less than market rate (16.5%). Therefore, we have a loss on issue of bonds in the form of Discount. Hence, we have to debit the 'Discount on bonds payable' account to the extent of discount i.e., 500000*(1-0.566886)= 216557. We are receiving the cash on issue of the bonds. Therefore, we have to debit the cash account to the extent of cash received i.e., 500000*0.566886 = 283443. Bonds payable forms part of long term liabilities and it should be credited to the extent of face value of the bonds. i.e., 500000

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