Accounting SmartBook Practice Test

When bonds are issued at a premium, the company receives more cash than the face value and must record the liability at the face value plus separately recognize the premium. The correct entry reflects the cash received, the Bonds Payable at its face amount, and the premium as a separate liability account.

So, debit Cash for 105, credit Bonds Payable for 100, and credit Premium on Bonds Payable for 5. This shows cash received of 105, the bond liability at its face value of 100, and the extra 5 as a premium that will be amortized over the life of the bond (reducing the interest expense over time).

The other options misstate the entry: one would record par issuance with no premium, another would omit the Bonds Payable liability entirely, and another would reflect a discount rather than a premium.