Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

SOLUTION TO EXERCISE 10-7

Explanation:

1. The face value of bonds issued is always recorded in the Bonds Payable (liability) account. The amount by which the proceeds ($4,055,000) exceed the face value ($4,000,000) is recorded in a separate liability account called Premium on Bonds Payable.
2. The face value of bonds payable is always recorded in the liability account called Bonds Payable. The amount by which the par value ($4,000,000) exceeds the issuance proceeds ($3,950,000) represents a discount and is recorded in a contra liability account called Discount on Bonds Payable.