The town of Liberty approved the construction of a special oven to cook the worl
ID: 2450127 • Letter: T
Question
The town of Liberty approved the construction of a special oven to cook the world’s largest apple pie, to be financed by 6% serial bonds. Interest is paid on Jan 1 and July 1 each year. Principal payments are made on Jan 1 each year. Any premium is amortized using straight-line over the 10-year life of the bonds. (Do not reduce for partial periods.)
Provide the fund and g-wide entries:
1. On May 1, Liberty issued $1,000,000 of the bonds at 104 plus accrued interest. Only the par value is authorized to be used for construction. All other funds raised must be used to service the debt.
2. On July 1, the semi-annual interest payment is made.
3. On Dec 31, adjusting entries are made.
What is the ending balance in:
Bonds Payable?
Premium on Bonds?
How much Interest Expense was recognized in the current year?
Explanation / Answer
Date Particulars JF Debit Credit
May 1, Cash A/c Dr $1,040,000
To Bonds Payable A/c $1,000,000
To Premium on Bonds Payable $40,000
(Being issuance of bonds with premium has recorded)
(10,000 * $100 =$1,000,000 + $40,000(10,000 * $4=$40,000)(100+4=104)
07/01 Interest A/c Dr $30,000
To Cash A/c $30,000
(being Interest paid for semi annual has recorded)
(10,000 * $100=$1,000,000 *6/100*6/12=$30,000
_________________________________________________________________
Dec 31, Interest Expense A/c Dr $30,000
To Interest payable A/c $30,000
(Being Interest should be paid in next month has recorded)
____________________________________________________________
Ending balance in Bonds Payable = $1,000,000 + $30,000 = $1,030,000
Premium on Bonds= $40,000
Interest Expense was recognized in the current year =$30,000(JUly)
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