Q49. Review questions 4
(1) Entity A issued $800,000 bonds at a discount and received $780,000 in cash.
(2) Entity B issued $900,000 bonds at a premium and received $950,000 in cash.
Prepare journal entries to record these transactions.
A49. Bonds payable is recorded on the credit side.
(1) Entity A issued $800,000 bonds at a discount and received $780,000 in cash.
| Debit | Credit | |
| Cash | 780,000 | |
| Discount on bonds payable | 20,000 | |
| Bonds payable | 800,000 |
[Note]
1. Increase in discount on bonds payable (contra-liability): debit
2. Discount on bonds payable is a contra-liability account, which is subtracted from bonds payable.
3. Discount on bonds payable is amortized over the life of bonds payable using the effective interest method.
(2) Entity B issued $900,000 bonds at a premium and received $950,000 in cash.
| Debit | Credit | |
| Cash | 950,000 | |
| Bonds payable | 900,000 | |
| Premium on bonds payable | 50,000 |
[Note]
1. Increase in premium on bonds payable (liability): credit
2. Premium on bonds payable is a liability account, which is added to bonds payable.
3. Premium on bonds payable is amortized over the life of bonds payable using the effective interest method.