Bluestone Company issued bonds with a face value of $500,000 on January 1, Year

Question

Bluestone Company issued bonds with a face value of $500,000 on January 1, Year 1 at 90. How would this event affect the company's financial statements? Multiple Choice Increase assets (cash) by $450,000, decrease liabilities (discounts on bonds payable) by $50,000, and increase liabilities by $500,000 Increase assets (cash) by $500,000, decrease liabilities (discounts on bonds payable) by $50,000, and increase liabilities by $550,000 Increase assets (cash) by $450,0 , decrease liabilities (premium on bonds payable) by $50,000, and increase liabilities by $500.000. Increase assets (cash) by $500,000 and increase liabilities by $500.000

Explanation / Answer

Answer:

Option i.e. Increase Assets (cash) by $450,000, Decrease liabilities (Discount on Bonds Payable) by $50,000 and Increase Liabilities by $500,000 is Correct.

The Bonds with Face Value are issued at 90 which is less than the Face Value. The Difference in the Face Value and the proceeds received is Discount on Bonds Payable.

The Cash received from issuance of Bonds Payable are $450,000 ($500,000 * 0.90). The Difference of $50,000 ($500,000 - $450,000) is Discount on Bonds Payable. The issuance will increase liability i.e. Bonds payable by $500,000 i.e. Face Value of Bonds which is to returned on Maturity Date, but at the same time discount on Bonds Payable will decrease the Net Liability by $50,000. The Journal entry to record the transaction is:

Cash ($500,000 * 0.90)                   450,000
Discount on Bonds Payable               50,000
Bonds Payable                                                500,000

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