The total cost of borrowing increased only if the bonds were issued at a premium

Question

The total cost of borrowing increased only if the bonds were issued at a premium. bonds were issued at a discount. bonds were sold at face value. None of the above Martinez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1, 2017, at 98. journal entry to record the issuance will show a debit to Cash of $2,000,000. credit to Discount on Bonds Payable for $40,000. credit to Bonds Payable for $2,040,000. debit to Cash for $1,960,000. Bond interest paid is higher when bonds sell at a discount. lower when bonds sell at a premium. the same whether bonds sell at a discount or a premium. higher when bonds sell at a discount and lower when bonds sell at a premium.

Explanation / Answer

20.

Par value of the bonds = $5,000,000

The bonds were issued at 102 means at a premium of 2%.

Therefore,

The total amount of cash received from the issue of the bonds = $5,000,000 x 1.02 = 5,100,000

And,

Premium on Bonds Payable = $100,000

The journal entry to record the issue of bonds will be prepared as follows:

Cash -------------------------------------------- $5,100,000

       Bonds Payable -------------------------------------------------- $5,000,000

       Premium on Bonds Payable --------------------------------- $100,000

The correct answer is d.

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