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How are they coming up with this explanation? It would seem as though when you issue a bond at a discount of 97 your entry for this would be:
(Dr) Cash 194,000
(Dr) Disc on Bonds Payable 6,000
(Cr) Bonds Payable 200,000
I realize that this is a sale that took place mid period, however, I’m still not understanding the explanation. Is it the wording? They are using the word “sold” and not issued. Perhaps that’s where my confusion lies?
Please see below…
On January 1, year 2, Battle Corporation sold at 97 plus accrued interest 200 of its 8%, $1,000 bonds. The bonds are dated October 1, year 1, and mature on October 1, year 12. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, year 1, to January 1, year 2 amounted to $4,000. As a result on January 1, year 2, Battle would record bonds payable, net of discount, at
$190,000
$194,000
$196,000
$198,000
A. $194,000
This answer is correct. Bonds payable sold at a discount should be recorded net of this discount. Battle would record the sale of these bonds at $194,000 (200 x $1,000 x .97). Note that this amount is not affected by accrued interest, which is reported separately as a current liability, interest payable.
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AUD: 78
REG: (74), 91
FAR: (71)
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