Question

In Fulbright County, the Culture and Recreation Department constructed a library in one of the county's high-growth areas. The construction was funded by a number of sources. Below is selected information related to the Library Capital Project Fund. All activity related to the library construction occurred within the current fiscal year. The county operates on a calendar-year basis.

The county issued $6,000,000 of 4 percent bonds, with interest payable semiannually on January 1 and July 1. The bonds sold for 101 on February 1. Proceeds from the bonds were to be used for construction of the library, with all interest and premiums received to be used to service the debt issue. Assume the premium and interest are recorded directly in the debt service fund.
a. Debit: Cash $6,060,000; Credit: Bonds Payable $6,000,000; Credit: Premium on Bonds Payable $60,000

b. Debit: Cash $6,060,000; Debit: Debt Service Fund $60,000; Credit: Bonds Payable $6,000,000

c. Debit: Debt Service Fund $6,060,000; Credit: Bonds Payable $6,000,000; Credit: Premium on Bonds Payable $60,000

d. Debit: Cash $6,000,000; Credit: Bonds Payable $6,000,000; Credit: Premium on Bonds Payable $60,000

Answer 1

The correct answer is a. Debit: Cash $6,060,000; Credit: Bonds Payable $6,000,000; Credit: Premium on Bonds Payable $60,000. When the county issued $6,000,000 of 4 percent bonds on February 1, the cash received from the bond issuance would be debited for the total amount received, which is $6,060,000.

Step-by-step explanation:

The correct answer is a. Debit: Cash $6,060,000; Credit: Bonds Payable $6,000,000; Credit: Premium on Bonds Payable $60,000.

When the county issued $6,000,000 of 4 percent bonds on February 1, the cash received from the bond issuance would be debited for the total amount received, which is $6,060,000. The bonds payable account would be credited for the principal amount of $6,000,000. Additionally, the premium on bonds payable account would be credited for the premium amount of $60,000. This premium represents the excess of the issue price over the face value of the bonds, and it is recorded as a liability in the debt service fund.