Question

Please complete, thank you!

Class, Riley Natural Fertilizer, Inc. issued $780,000 of 8% face value bonds on January 1, 2016, for $763,800. The bonds are due December 31, 2018, and pay interest semiannually on June 30 and December 31. Riley uses the straight-line amortization method.

What journal entry would we make on Riley's books on January 1, 2016?

Explain why you have chosen the accounts you have chosen.

Answer 1

Date	Accounts Name and Explanation	Debit	Credit
January 1, 2016	Cash	763,800
	Discount on bonds payable	16,200		(780000 - 763800)
	Bonds Payable		780,000
	(To record issuance of bonds on discount)
	We have choose following accounts
Accounts name	Reason
Cash	Because we have received cash against issue of bonds
Bonds payable	We have incurred a liability which we need to pay in future. We need to recognize such liability.
Discount on bonds payable	The cash we received is less than the liability we raised. The difference amount is actually our expense. However this is not a one period expense, this is expense spread over the life of bonds. This expense has a nature of interest expense hence it is amortized at the time of booking interest amount.