Question

question 1 (5 points) the simpson corporation issued 8%, 10 - year - term bonds on january 1, 2014, with a face value of $1,000,000. interest is payable semi - annually on june 30 and december 31. the bonds were issued for $875,378 to yield an effective annual rate of 10%. simpson uses the straight - line method of amortization. the journal entry to record the issuance of the bonds will include a debit to interest payable $124,622. credit to bonds payable for $875,378. debit to discount on bonds payable for $124,622. debit to cash for $1,000,000.

Explanation:

Step1: Calculate bond discount

The face - value of bonds is $F = \$1,000,000$ and the issue price is $P=\$875,378$. The bond discount $D$ is calculated as $D = F - P$.
$D=1000000 - 875378=\$124,622$

Step2: Analyze journal - entry for bond issuance

When bonds are issued at a discount, the company debits Cash for the amount received ($\$875,378$), debits Discount on Bonds Payable for the discount amount ($\$124,622$), and credits Bonds Payable for the face - value of the bonds ($\$1,000,000$).

Answer:

debit to Discount on Bonds Payable for $124,622$