When bonds are issued at a premium, cash proceeds are:

When bonds are issued at a premium, cash proceeds are:

• A. Greater than the face value
• B. Equal to the face value
• C. Less than the face value
• D. Not related to the face value

Answer: (A)

When bonds are issued at a premium, the cash received from issuing the bonds exceeds the bonds’ stated face value. This happens because the bond’s coupon rate is higher than current market rates, making investors willing to pay more than the face value to get those higher interest payments. So the proceeds from issuance are greater than the face value, with the excess recorded as a Premium on Bonds Payable. For example, a bond with a face value of 1,000 might be issued for 1,050; cash increases by 1,050, Bonds Payable is recorded at 1,000, and the 50 excess is shown as Premium on Bonds Payable. If it were issued at par, cash would equal the face value; if issued at a discount, cash would be less than the face value. Not related would ignore the relationship between issue price and face value.

When bonds are issued at a premium, the cash received from issuing the bonds exceeds the bonds’ stated face value. This happens because the bond’s coupon rate is higher than current market rates, making investors willing to pay more than the face value to get those higher interest payments. So the proceeds from issuance are greater than the face value, with the excess recorded as a Premium on Bonds Payable.

For example, a bond with a face value of 1,000 might be issued for 1,050; cash increases by 1,050, Bonds Payable is recorded at 1,000, and the 50 excess is shown as Premium on Bonds Payable. If it were issued at par, cash would equal the face value; if issued at a discount, cash would be less than the face value. Not related would ignore the relationship between issue price and face value.