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Legacy issues $640,000 of 8.5%, four-year bonds dated January 1, 2017, that pay interest semiannually on June 30 and December 31. They are issued at $570,443 and their market rate is 12% at the issue date.

Required:
Record the issue of bonds with a par value of $640,000 cash on January 1, 2017 at an issue price of $570,443.

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Answer:

                                                        Debit                               Credit

Jan 1 2017  

Cash                                                 570,443

Discount on bond                            69,557

    Bond payable account                                                      640,000

For the issue of bonds on discount

Explanation:

Legacy sold the bonds at a discount .A bond is said to be sold at a discount if it is sold at a price less that its face value. The difference  is called the discount.

To record the issuance of a bond at discount, the following accounts would be used :

  1. Cash account- to record the amount received from the issuance
  2. Discount on bonds- this a contra-liability account to record the discount on the issue
  3. Bond payable account : Another liability account to record the face value or principal amount of the bond.

Discount on bond = 640,000 - 570,443 = 69,557

Accounting entries:

                                                        Debit                               Credit

Jan 1 2017  

Cash                                                 570,443

Discount on bond                            69,557

    Bond payable account                                                      640,000

For the issue of bonds on discount

Note that the cash account was debited to increase the asset value and the the bond payable account credit to recognize an increase in liability.

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