Question

Callaway County issued $10,000,000 in bonds at 101 for the purpose of constructing a new County Recreation Center. State law requires that any premium on bond issues be deposited directly in a debt service fund for eventual repayment of bond principal. The journal entry to record issuance of the bonds will require a (an):

a. Debit: Premium on Bonds Payable $100,000; Credit: Bonds Payable $10,000,000; Credit: Cash $10,100,000

b. Debit: Bonds Payable $10,100,000; Credit: Cash $10,100,000

c. Debit: Cash $10,100,000; Credit: Bonds Payable $10,000,000; Credit: Premium on Bonds Payable $100,000

d. Debit: Debt Service Fund $100,000; Credit: Premium on Bonds Payable $100,000

Answer 1

The correct journal entry for the bond issuance at a premium by Callaway County is a debit to Cash for $10,100,000 and credits to Bonds Payable for $10,000,000 and Premium on Bonds Payable for $100,000.

Step-by-step explanation:

The student is asking about the correct journal entry for the issuance of bonds by Callaway County at a premium. The bonds were issued for $10,000,000 at 101, meaning they were sold for $10,100,000, which includes a $100,000 premium. Given that the premium must be used for repayment of the bond principal and placed in a debt service fund, the correct journal entry is:

Debit: Cash $10,100,000

;

Credit: Bonds Payable $10,000,000

;

Credit: Premium on Bonds Payable $100,000

This entry reflects the cash inflow from the bond issuance, the bond obligation incurred by the county, and the premium on the bonds payable that will eventually be used to pay down the bond principal.