Financial Accounting and Reporting-CPA Practice Exam

What is the correct journal entry to record bond issuance costs?

1. Credit Bonds Payable for cash proceeds.

2. Debit Cash, Debit All Additions, and Credit Bonds Payable.

3. Debit Cash, Debit Discount and Bond Issuance Costs, Credit Bonds Payable.

4. Debit Bonds Payable, Credit Cash, and Credit Premium.

The correct answer is: Debit Cash, Debit Discount and Bond Issuance Costs, Credit Bonds Payable.

When a company issues bonds, it may incur various costs directly related to the issuance of those bonds, known as bond issuance costs. These costs can include fees for underwriting, printing, legal fees, and other related expenditures. In the context of bond accounting, the correct journal entry captures both the cash received from the bondholders and the costs incurred during the issuance process. The correct answer reflects the financial impacts of the bond issuance: 1. **Debit Cash**: This reflects the actual cash the company receives from issuing the bonds. The company records this amount as an increase in cash assets on its balance sheet. 2. **Debit Discount and Bond Issuance Costs**: This entry is crucial as it represents the bond issuance costs that the company has incurred. These costs typically reduce the net proceeds from the bond issue and are often amortized over the life of the bonds. 3. **Credit Bonds Payable**: This accounts for the total liability created by issuing the bonds. It reflects the total face value of the bonds issued, which the company is obligated to pay back to the bondholders at maturity. Thus, the journal entry accurately aligns with the accounting principles for recognizing the cash received, the liabilities incurred, and the costs associated with issuing