On January 1, Year 1, McGee Corporation issues 5%, 10-year bonds with a face amount of $100,000. Interest is paid semiannually on June 30 and December 31. On issuance date, the market rate of interest is 5%; therefore, the issue price of the bonds is $100,000. The journal entry for the issuance of the bonds will include a:Multiple Choicedebit to Bonds Payable for $105,000debit to Cash for $105,000credit to Bonds Payable for $100,000credit to Cash for $100,000
Question
On January 1, Year 1, McGee Corporation issues 5%, 10-year bonds with a face amount of 100,000. The journal entry for the issuance of the bonds will include a:Multiple Choicedebit to Bonds Payable for 105,000credit to Bonds Payable for 100,000
Solution
The correct answer is: credit to Bonds Payable for $100,000.
Here's the step-by-step explanation:
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When a company issues bonds, it essentially borrows money from the bondholders. The company is obligated to pay back this amount (the face amount) at a future date (maturity date). In this case, McGee Corporation is borrowing $100,000 from the bondholders.
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The journal entry to record the issuance of the bonds would be a debit to Cash and a credit to Bonds Payable. Debiting Cash increases the company's cash account, reflecting the inflow of cash from the bondholders. Crediting Bonds Payable increases the company's liabilities, reflecting the obligation to pay back the bondholders.
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The amount debited and credited is the face amount of the bonds, which is $100,000. This is because the bonds were issued at par, meaning the issue price is the same as the face amount.
So, the journal entry would be:
Debit: Cash 100,000
Therefore, the correct answer is "credit to Bonds Payable for $100,000".
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