Question

Riot Company issued $500000, 15-year, 7% bonds at .96. ( I DO NOT NEED THE ANSWER, JUST THE EXPLANATION OF ONE NUMBER. Thank you)

a) Prepare the journal entry to record the sale of these bonds on January 1, 2014.

Correct Answer from the answer key:

Jan. 1           Cash ($500,000 ´ .96) ..........................................      480,000

                           Discount on Bonds Payable)...........................        26,000

                                    Bonds Payable.......................................           500,000

I understand the Cash number and the bonds payable. How do you determine the discount on Bonds Payable. I would have thought it would be $20000 rather than $26000 so that the credit equals the debit. If you could show me how to get the $26000 and a quick explanation on the why.

Answer 1

The Entry Provided by you is Wrong . The Correct entry is given Below
AccountsTitles and Explanation	Debit	Credit
Cash ( $ 500,000 x 0.96)	$ 480,000
Discount on Bonds Payable    - Balancing Figure	$ 20,000
Bonds Payable		$ 500,000
(To record the sale of Bonds at Disount )
Discount on Bonds Payable is the difference between the Bonds Issued value and Value of Bonds	$ 500,000 (-) $ 480,000	$ 20,000
Since Bonds are issued at Discount,the differene in Issue price and Bond Value will be Debited as Discount on Notes Payable	$ 20,000