Since the corporation must pay the bond issue costs of $150,000 when the bonds are issued, but can expense only $10,000 per year, the bond issue costs need to be deferred to a long-term asset account. In effect the bond issue costs are prepaid expenses, which are part of the definition of assets. (Recall, that the payment of a 6-month or 12-month insurance premium is reported as a current asset until it expires and is then expensed.)
The journal entry for the bond issue costs will initially be a debit of $150,000 to Bond Issue Costs and a credit to Cash or Accounts Payable. Then each year that the bonds are outstanding there needs to be an accounting entry to credit Bond Issue Costs for $10,000 and to debit Bond Issue Costs Expense. This is referred to as amortization and it results in the balance in the long-term asset account Bond Issue Costs being reduced to $0 by the time the bonds mature.
Studies show that exam questions are a great way to learn and retain important information. Gain access to our 1,700 accounting exam questions (and answers) when you upgrade to PRO.