Question

Fernetti Company sold $6,000,000, 9%, 10-year bonds on January 1, 2014. The bonds were dated January 1, 2014, and pay interest on January 1 and July 1. Fernetti Company uses the straight-line method to amortize bond premium or discount. The bonds were sold at 96. Assume no interest is accrued on June 30.

Instructions

(a) Prepare all the necessary journal entries to record the issuance of the bonds and bondinterest expense for 2014, assuming that the bonds sold at 102.(b) Prepare journal entries as in part (a) assuming that the bonds sold at 96.(c) Show statement of financial position presentation for each bond issued at December31, 2014.

Answer 1

Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2014	Cash	6,120,000		(6,000,000 x 102/100)
	Premium on Bonds Payable		120,000
	Bonds Payable		6,000,000
July 1, 2014	Interest Expense	264,000
	Premium on Bonds Payable	6,000		(120,000/10 x 1/2)
	Cash		270,000	(6,000,000 x 9% x 1/2)
Dec 1, 2014	Interest Expense	264,000
	Premium on Bonds Payable	6,000
	Interest Payable		270,000
Date	Account Titles and Explanation	Debit	Credit
Jan 1, 2014	Cash	5,760,000		(6,000,000 x 0.96)
	Discount on Bonds Payable	240,000
	Bonds Payable		6,000,000
July 1, 2014	Interest Expense	282,000
	Discount on Bonds Payable		12,000	(240,000/10 x 1/2)
	Cash		270,000	(6,000,000 x 9% x 1/2)
Dec 1, 2014	Interest Expense	282,000
	Discount on Bonds Payable		12,000
	Interest Payable		270,000
	Fernetti Company
	Balance Sheet (Partial)
	For the Year Ended December 31, 2014
	Bonds Payable	6,000,000
	Add: Premium on Bonds Payable	108,000
		6,108,000
	Fernetti Company
	Balance Sheet (Partial)
	For the Year Ended December 31, 2014
	Bonds Payable	6,000,000
	Less: Discount on Bonds Payable	216,000
		5,784,000