Ravine Company issues $400,000, 20-year, 7% bonds at 101. Prepare a tabular summary to record the sale of these bonds on June 1, 2017. (If a transaction causes a decrease in Assets, Liabilities or Stockholders' Equity, place a negative sign (or parentheses) in front of the amount entered for the particular Asset, Liability or Equity item that was reduced.)

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Anastasia Santiago

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Ravine Company issues $400,000, 20-year, 7% bonds at 101. Prepare a tabular summary to record the sale of these bonds on June 1, 2017. (If a transaction causes a decrease in Assets, Liabilities or Stockholders' Equity, place a negative sign (or parentheses) in front of the amount entered for the particular Asset, Liability or Equity item that was reduced.)

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Delilah Ibarra · Answer 1

Dr Cash $404000 increase in asset

Cr Bonds payable $400000 increase in liabilities

Cr Bond premium $4000 increase in liabilities

Explanation:

The impact of the bond issue as it affects asset, liabilities or equity is discussed below.

The issue of bond gave rise to cash of $404,000 ($101/$100*$400000)

The receipt of $404000 from the issue implies that cash, an asset of Ravine Company has increased by $404000.

However, for every debit entry passed in the books of account there must be a corresponding credit, hence the transaction increases the company liabilities by $404000, split into $400000 bonds payable and $4000 bond premium.

The premium is amortized to income statement over the tenure of the bond.