Module 2: Problem 1. Prepare the necessary journal entries to record the followi

Question

Module 2: Problem 1. Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Pitts Co.: March 1 Issued $2,000,000 face value Pitts Co. second mortgage, 8% bonds for $2,180,400, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1. The bonds are callable at 102. June 1 Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or discount.) December 1 Paid semiannual interest on Pitts Co. bonds and purchased $1,000,000 face value bonds at the call price in accordance with the provisions of the bond indenture.

Explanation / Answer

March 1 Issued $2,000,000 face value Pitts Co. second mortgage, 8% bonds for $2,180,400, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1. The bonds are callable at 102. Debit: Cash 2,180,400 Credit: Bonds payable 2,000,000 Credit: Premium on bonds payable 140,400 Credit: Interest payable 40,000 (2,000,000*.08*3/12) June 1 Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or discount.) Debit: Interest payable 40,000 Debit: Interest expense 36,400 Debit: Premium on bonds payable 3,600 (140,400/9.75 years = 14,400 per year, 3 months = 14,400*3/12 = 3600) Credit: Cash 80,000 December 1 Paid semiannual interest on Pitts Co. bonds and purchased $1,000,000 face value bonds at the call price in accordance with the provisions of the bond indenture. Debit: Interest expense 72,800 Credit: Premium on bonds payable 7,200 Credit: Cash 80,000 Debit: Bonds payable 1,000,000 Debit: Loss on retirement of bonds 20,000 Credit: Cash 1,020,000

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