Bonds with a face amount of $1,000,000 are sold at 98. The entry to record the issuance is a. Cash 980,000 Discount on Bonds Payable 20,000 Bonds Payable 1,000,000 b. Cash 980,000 Premium on Bonds Payable 20,000 Bonds Payable 1,000,000 c. Cash 980,000 Bonds Payable 980,000 d. Cash 1,000,000 Premium on Bonds Payable 20,000 Bonds Payable 980,000

a. Cash 980,000 Discount on Bonds Payable 20,000 Bonds Payable 1,000,000

Explanation:

The bonds are issued at a discount whenever the rate of interest in market is higher than the coupon rate on bond. The bonds are denoted as 100 when they are issued at par. If the bonds are denoted as anything below 100, they are issued at discount and if they are denoted as anything above 100, they are issued at a premium.

The discount on bond issued at 98 = 1000000 * 0.02  =  20000

The cash received on the issue of bond at 98 = 1000000 - 20000 = 980000

Cash                                          980000 Dr

Discount on Bonds Payable    20000 Dr

         Bonds Payable                        1000000 Cr

SO, option A is the correct answer.

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