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The following is taken from the Pinkston Company balance sheet

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The following is taken from the Pinkston Company balance sheet Powered By Docstoc
					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

                                                                                 $114,000
**$200,000 – $10,000 – $76,000 = $114,000;                                                = $6,000 or $10,000 X .60.
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