The following is taken from the Pinkston Company balance sheet. PINKSTON COMPANY
ID: 2436079 • Letter: T
Question
The following is taken from the Pinkston Company balance sheet.PINKSTON COMPANY
Balance Sheet (partial)
December 31, 2011
Current liabilities
Bond interest payable (for 6 months from July 1 to December 31) $ 123,360
Long-term liabilities
Bonds payable, 8% due January 1, 2022 $3,084,000
Add: Premium on bonds payable
159,800
$3,243,800
Interest is payable semiannually on January 1 and July 1. The bonds are callable on any semiannual interest date. Pinkston uses straight-line amortization for any bond premium or discount. From December 31, 2011, the bonds will be outstanding for an additional 10 years (120 months).
q1 Journalize the payment of bond interest on January 1, 2012.
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q2 Prepare the entry to amortize bond premium and to pay the interest due on July 1, 2012, assuming no accrual of interest on June 30.
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q3 Assume that on July 1, 2012, after paying interest, Pinkston Company calls bonds having a face value of $1,233,600. The call price is 102. Record the redemption of the bonds.
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q4 Prepare the adjusting entry at December 31, 2012, to amortize bond premium and to accrue interest on the remaining bonds.
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Explanation / Answer
1. Dr Interest Payable 123,360 CR Cash 123,360 2. DR Interest Expense 123,360 CR Cash 123,360 DR Amortization Exp. 7,990 (159800/20) CR Bond premium 7,990 3. DR Bonds Payable 1,233,600 DR Amortization Exp. 60,724 (1233600/3084000=40% , 159,800- 151810*40% = 60724) DRLoss on sale of bond 24,672 (2%*Bond face value) CR Cash 1233600+24672=1,258,272 CR Bond Premium 60,724 4. DR Interest Expense 74,016 (3084000-1233600=1850400 *.08/2) CR Interest Payable 74,016 DR Amortization 4,794 (159,800-7990-60724=91086 /19) CR Bond Premium 4794
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