Question

Mobbe Company issued $500,000, 15-year, 7% bonds at 96.

Instructions

(a)  

Prepare the journal entry to record the sale of these bonds on January 1, 2017.

(b)  

Suppose the remaining Discount on Bonds Payable was $12,000 on December 31, 2022. Show the balance sheet presentation on this date.

(c)  

Explain why the bonds sold at a price below the face amount.

Answer 1

a)  

Prepare the journal entry to record the sale of these bonds on January 1, 2017.

Date	Description	debit $	Credit $
1-Jan	Cash (500,000*0.96)	480000
	Discounts on bonds payable	20,000
	Bonds payable		500,000
	(to record the issue of bond)

_________________________________________

(b)  

Suppose the remaining Discount on Bonds Payable was $12,000 on December 31, 2022. Show the balance sheet presentation on this date.

Mobbe Company
Balance sheet (partial)
31-Dec-22
Long term liability
Bonds payable	500,000
less: Discounts on bonds payable	-12000	488,000

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(c)  

Explain why the bonds sold at a price below the face amount.

Main reason behind the bonds are selling at the lower price than its face value because because the contractual interest rate is lower than the interest rate prevailing in the market