during the year, Pigeon City engaged in the following transactions. The city has
ID: 2541637 • Letter: D
Question
during the year, Pigeon City engaged in the following transactions. The city has a 12/31 fiscal year end. Record the transactions listed below and indicate in which fund the entry is made.
a. On February 1, 2017, the city issued bonds in the amount of $900,000. The bonds sold for 101, and the city incurred $15,000 bonds issuance costs. The proceeds will be used to purchase a warehouse, to store old paperwork and other important city documents.
b. On February 17, 2017, the city purchased the warehouse mentioned above for $878,000 for cash.
c. On March 29, 2017, the city transferred $123,000 to its debt service fund, for the upcoming payment of outstanding bonds’ principal and interest.
d. On April 1, 2017, the city made payments of $100,000 principal and $23,000 interest on outstanding bonds.
e. On September 5, 2017, the city leased a paper-shredding machine. The lease qualified as a capital lease. The terms of the lease required yearly payments, starting next year. The present value of the minimum lease payments is $19,000.
Explanation / Answer
1. Assuming the face value of the bonds to be $100, the total number of issued bonds are $900000/$100 = 9000bonds
the entry to be made at the time of issuance bond would be (as on 01/02/2017):
cash a/c dr 907500
bond issuance cost a/c dr 15000
premium on bonds payable (1x9000) 9000
bonds payable (100x9000) 900000
where,premium on bonds payable is considered as a long term liability and is to be amortizedf with the payment of interest expense.similarly, bond issuance cost would be amortized during the payment of interest, upto which it is to be recorded in the balance sheet assets side.
2. 17/02/2017 warehouse a/c dr 878000
to cash a/c 878000
( being the purchase of the warehouse)
3. 29/03/2017 debt service fund a/c dr 123000
to cash a/c 123000
( being amount transfered to debt service fund a/c)
4. 01/04/2017 bonds payable a/c dr 100000
premium amount payable a/c dr 9000
bond interest expense a/c (23000-9000)dr 14000
to bond issuance cost 15000
to cash 108000
5 . capital lease is a type of lease in which risk and rewards are transfered to ther lessee once the contract is made and at the time of the contract , the pv of the minimum lease payments shouls be recorded in the books of accounts.
hence the entry to be made would be:
05/09/2017 lease receivable a/c dr. 19000
asset a/c 19000
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