Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation

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Sky

12 May, 10:22

Megginson, Inc. issued a five-year corporate bond of $300,000 with a 5% interest rate for $290,000. What effect would the bond issuance have on Megginson, Inc.'s accounting equation

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Jordon Morse · Answer 1

Megginson, Inc.

Effect of the Bond Issuance on Megginson, Inc.'s accounting equation:

(The account equation states that Assets = Liabilities + Equity.)

With the bond issuance, the Assets (Cash) will increase by $290,000 and the Liabilities (Bonds Payable) will increase by $300,000, and there will be a loss (Equity - Retained Earnings) of $10,000 in the form of Discount on Bonds. This discount on bonds is usually amortized over the bonds' life, thus increasing the interest payable.

Explanation:

The issuance of bonds is one of the means of obtaining finance for business operations. It is a long-term borrowing, which entities use to finance the activities when funds cannot be sourced from other sources or when it is considered cheaper to borrow from outside sources.