Chapter 12: Q26E_2 (page 661)

Retiring bonds payable before maturity
CoastalView Magazineissued $600,000 of 15-year, 5% callable bonds payable on July31, 2018, at 94. On July 31, 2021, CoastalViewcalled the bonds at 101. Assume annualinterest payments.
Requirements
1. Without making journal entries, compute the carrying amount of the bonds payableat July 31, 2021.
2. Assume all amortization has been recorded properly. Journalize the retirement ofthe bonds on July 31, 2021. No explanation is required.

Short Answer

Expert verified

The bonds payable and loss on the retirement of the bonds is debited by $600,000 and $34,800.The discount on bonds payable and cash is credited by $28,800 and $606,000.

Step by step solution

Calculation of the carrying amount of bonds payable

Date	Particulars	Debit	Credit
July 31, 2021	Bonds payable	$600,000
	Loss on Retirement of Bonds	$34,800
	Discount on Bonds Payable		$28,800
	Cash		$606,000
	(To record the retirement of the bonds)

Working Notes:

$\begin{matrix} D i s c o u n t A l l o w e d = P a r V a l u e - I s s u e d P r i c e \\ = $ 600, 000 - $ 600, 000 \times \frac{94}{100} \\ = $ 36, 000 \end{matrix}$

$\begin{matrix} D i s c o u n t A m o r t i z e T i l l 31 J u l y = \frac{D i s c o u n t A l l o w e d}{M a t u r i t y P e r i o d} \times N u m b e r o f Y e a r s \\ = \frac{$ 36, 000}{15} \\ = $ 2, 400 \times 3 \\ = $ 7, 200 \end{matrix}$

$\begin{matrix} R e m i n i n g D i s c o u n t = T o t a l d i s c o u n t - D i s c o u n t A m o r t i z e T i l l 31 J u l y \\ = $ 36, 000 - $ 7, 200 \\ = $ 28, 800 \end{matrix}$

$\begin{matrix} C a s h P a y a b l e a t M a t u r i t y = P a r V a l u e \times \frac{$ 101}{100} \\ = $ 600, 000 \times \frac{$ 101}{100} \\ = $ 606, 000 \end{matrix}$

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Calculation of the carrying amount of bonds payable

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