The following is taken from the Pinkston Company balance sheet. PINKSTON COMPANY Balance Sheet (partial) December 31, 2010 Current liabilities Bond interest payable (for 6 months from July 1 to December 31) $ 105,000 Long-term liabilities Bonds payable, 7% due January 1, 2021 $3,000,000 Add: Premium on bonds payable 200,000 $3,200,000 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, 2010, the bonds will be outstanding for an additional 10 years (120 months). Hint: Prepare entries to record interest payments, straight-line premium amortization, and redemption of bonds. (SO 2, 3, 9) Instructions (a) Journalize the payment of bond interest on January 1, 2011. (b) Prepare the entry to amortize bond premium and to pay the interest due on July 1, 2011, assuming no accrual of interest on June 30. Amortization $10,000 (c) Assume that on July 1, 2011, after paying interest, Pinkston Company calls bonds having a face value of $1,200,000. The call price is 101. Record the redemption of the bonds. Gain $64,000 (d) Prepare the adjusting entry at December 31, 2011, to amortize bond premium and to accrue interest on the remaining bonds. Amortization $6,000
(a) 2011
Jan. 1 Bond Interest Payable 105,000**
Cash 105,000
(b) July 1 Bond Interest Expense 95,000**
Premium on Bonds Payable
($200,000 ÷ 20) 10,000
Cash 105,000
(c) July 1 Bonds Payable 1,200,000**
Premium on Bonds Payable 76,000**
Gain on Bond Redemption
($1,276,000 – $1,212,000) 64,000
Cash ($1,200,000 X 101%) 1,212,000
*($200,000 – $10,000) X .40 = $76,000
(d) Dec. 31 Bond Interest Expense 57,000**
Premium on Bonds Payable 6,000**
Bond Interest Payable
($1,800,000 X 7% X 1/2) 63,000
**$200,000 – $10,000 – $76,000 = $114,000; = $6,000 or $10,000 X .60.