New Computer Technology, Inc., has outstanding $600,000 of its 10 percent bonds payable, dated January 1, 2016,

Question:

New Computer Technology, Inc., has outstanding $600,000 of its 10 percent bonds payable, dated January 1, 2016, and maturing on January 1, 2036, 20 years later. The corporation is required under the bond contract to transfer $30,000 to a sinking fund each year. The directors have also voted to restrict retained earnings by transferring $30,000 each year on January 1 over the life of the bond issue to a Retained Earnings Appropriated for Bond Retirement account.

INSTRUCTIONS

1. Prepare entries in general journal form to record the January 1, 2016, issuance of bonds at face value, the establishment of the Bond Sinking Fund Investment account, and the appropriation of retained earnings.

2. Show how the Bond Sinking Fund Investment account and the Retained Earnings Appropriated for Bond Retirement account would be presented on the balance sheet as of December 31, 2020. (Assume that the ending balance of the Bond Sinking Fund Investment was $150,000 and the Retained Earnings-Unappropriated account was $320,210.)

3. Assuming that the Bond Sinking Fund Investment account had a balance of $600,000 on January 1, 2036, give the entry in general journal form to record the retirement of the bonds and remove the appropriation for retained earnings.

Analyze:

What percentage of total retained earnings has been appropriated for bond retirement on December 31, 2020?

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