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A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between par value and issue price for this bond is recorded as a: Multiple Choice Debit to Discount on Bonds Payable. Credit to Interest Income. Credit to Discount on Bonds Payable. Debit to Premium on Bonds Payable. Credit to Premium on Bonds Payable.

A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between par value and issue price for this bond is recorded as a: Multiple Choice Debit to Discount on Bonds Payable. Credit to Interest Income. Credit to Discount on Bonds Payable. Debit to Premium on Bonds Payable. Credit to Premium on Bonds Payable.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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**Understanding Bonds Payable: A Practical Example** A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between the par value and the issue price for this bond needs to be appropriately recorded in the company's accounting books. Let's explore how this difference is recorded with a multiple-choice question: **Multiple Choice: Recording the Bond Premium** When a bond is issued for more than its par value, the additional amount received is referred to as a premium. This premium must be recorded correctly in the company's financial records. The question below asks how this premium should be recorded. **Options:** 1. Debit to Discount on Bonds Payable. 2. Credit to Interest Income. 3. Credit to Discount on Bonds Payable. 4. Debit to Premium on Bonds Payable. 5. Credit to Premium on Bonds Payable. In this scenario, the correct answer is to **Credit to Premium on Bonds Payable**. This is because the bond was issued at a price higher than its par value, and the premium represents an additional liability above the par value of the bonds. The selected answer, which is highlighted and indicated by a blue circle, is: - Credit to Premium on Bonds Payable. **Conclusion:** When bonds are issued at a premium, the premium amount is credited to a separate account called "Premium on Bonds Payable," which is a liability account. Recording this premium accurately ensures that the company's financial statements reflect the true financial position. Understanding how to properly account for bond premiums is essential for accurate financial management and reporting.
Transcribed Image Text:**Understanding Bonds Payable: A Practical Example** A company received cash proceeds of $206,948 on a bond issue with a par value of $200,000. The difference between the par value and the issue price for this bond needs to be appropriately recorded in the company's accounting books. Let's explore how this difference is recorded with a multiple-choice question: **Multiple Choice: Recording the Bond Premium** When a bond is issued for more than its par value, the additional amount received is referred to as a premium. This premium must be recorded correctly in the company's financial records. The question below asks how this premium should be recorded. **Options:** 1. Debit to Discount on Bonds Payable. 2. Credit to Interest Income. 3. Credit to Discount on Bonds Payable. 4. Debit to Premium on Bonds Payable. 5. Credit to Premium on Bonds Payable. In this scenario, the correct answer is to **Credit to Premium on Bonds Payable**. This is because the bond was issued at a price higher than its par value, and the premium represents an additional liability above the par value of the bonds. The selected answer, which is highlighted and indicated by a blue circle, is: - Credit to Premium on Bonds Payable. **Conclusion:** When bonds are issued at a premium, the premium amount is credited to a separate account called "Premium on Bonds Payable," which is a liability account. Recording this premium accurately ensures that the company's financial statements reflect the true financial position. Understanding how to properly account for bond premiums is essential for accurate financial management and reporting.
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