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Trego Company issued,on December 31,2018,$1,000,000 face value,4%,5-year bonds.Interest will be paid semiannually each June 30 and December 31.The bonds sold at a price of 102;Trego uses the straight-line method of amortizing bond discount or premium.
-The entry made by Trego Company to record issuance of the bonds payable at December 31,2018,includes:
A)A debit to Cash of $1,000,000.
B)A credit to Premium on Bonds Payable of $20,000.
C)A credit to Bonds Payable of $1,020,000.
D)A credit to Bond Interest Payable of $20,000.

Question

Quizplus · Accepted Answer

Since the bonds were sold at 102, this means they were sold at 102% of their face value. Therefore, the company received $1,020,000 (102% of $1,000,000). The premium on bonds payable, which is the difference between the cash received and the face value of the bonds, is $20,000 ($1,020,000 - $1,000,000). This premium is credited to the Premium on Bonds Payable account.

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