Question

Question: Enviro Company issues 8%, 10-year bonds with a par value of $250,000 and semi annual interest payments. On the issue date, the annual market rate for these bonds is 10%, which implies a selling price of 87½. Prepare the journal entry for the issuance of the bonds. Assume the bonds are issued for cash on January 1, 2017.

Short answer

Answer

The discount on bond payable is $31,250

Step-by-step solution

Meaning of Bond

Bonds are long-term financial debt instruments issued by a company for which the company pays interest to the bondholders and repays the borrowed amount after a specific period. A company can issue bonds at par, premium, or discount.

Journal entry for the issuance of the bond

Date	Account and explanation	Debit ($)	Credit ($)
Jan 01, 2017	Cash (refer working note)	218,750
	Discount on Bonds Payable	31,250
	Bonds Payable		250,000
	(To record the selling of bonds at a discount)

Showing Balance sheet (extract)

Balance Sheet (Extract)
Particulars
Long-term liabilities	Amount ($)
Bonds payable, 8%, due December 31, 2026 Less: discount on bonds payable	$250,000 $(31,250)
Carrying value of Bonds		$218,750

Working note:

Calculation of issue price of bond

$$\begin{gathered} \text{Issue} \text{price}=\$250,000\times 87.5\% \\ =\$218,750 \end{gathered}$$

Calculation of discount on bond payable

$$\begin{gathered} \text{Discount} \text{on} \text{bond} \text{payable}=\$250,000-\$218,750 \\ =\$31,250 \end{gathered}$$