James corporation issued $2000,000 face value bonds for $2,020,000. Each $1,000

Question

James corporation issued $2000,000 face value bonds for $2,020,000. Each $1,000 cond was issued with two detachable warrants. On the date of the issuance, the market value of warrants was $3 each. What amount should be debited or credited to Discount/Premium on Bonds Payable at the time of issuance?

A. Premium on Bonds Payable is credited for $20,000

b. Premium on Bonds Payable is credited for $8000

c. Discount on Bonds Payable is debited for $8000

D. Discount on Bonds Payable is debited for $3000

E. None of the above

Please show work.  

Explanation / Answer

Sum received=(2000*1000*101%) = 2020000

Less: amount allocated warrants (2000*2*3) =12000

Amount allocated to bonds =2008000

Face value =2000000

Amount allocated on bonds is greater than face value and therefore difference is considered as a premium

Premium = 2008000-2000000=8000

And premium is always credited

Therefore option B is the correct answer

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