Question

Please show all supporting computations. Points will be deducted if you do not show your work. 1. Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Pitts Company: (4 points) January 1 Issued $3.000,000 of Pitts Company 5-ycar, 4% bonds at a price of 96.5. Interest on the bonds is payable semiannually on July 1 and January 1. The bonds are callable after 2 years at a price of 102. July 1 Paid semiannual interest on Pitts Company bonds. (Use straight-line amortization) December 31 Accrued semiannual interest on Pitts Company bonds. Debit Credit Account Titles Date At the end of the year, after two amortization entries, what is the carrying value of the bond? -1 -

Answer 1

Q1:

Answer:

i. Journal Entries:

Date	Account title and Explanation	Debit	Credit
January 1	Cash (3,000,000 x 0.965)	$2,895,000
	Discount on bonds payable		$105,000
	Bonds payable		$3,000,000
	[To record issuance of bonds]
July 1	Interest expense	$70,500
	Discount on bonds payable ($105,000/10 payments)		$10,500
	Cash (3,000,000 x 4% x (6/12))		$60,000
	[To record interest payment]
December 31	Interest expense	$70,500
	Discount on bonds payable ($105,000/10 payments)		$10,500
	Interest payable (3,000,000 x 4% x (6/12))		$60,000
	[To record accrued interest expense]

ii. Carrying value after two amortization entries:

Carrying value = 2,895,000 + 10,500 +10,500 = $2,916,000