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Chapter 14: 13E (page 756)

(Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding \(6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued \)9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.

Instructions

Prepare the journal entries necessary to record issue of the new bonds and refunding of the bonds.

Short Answer

Expert verified

Discount on issue of bonds $180,000

Loss on redemption of bonds $240,000

Step by step solution

01

Meaning of Bonds

Bonds are long-term financial debt instruments issued by a company for which the company pays interest to the bondholders and repays the borrowed amount after a specific period. A company can issue bonds at par, premium, or discount.

02

Journal Entries

Date

Accounts Titles and Explanations

Debit

Credit

July 1

Cash

$8,820,000

Discount on Bonds Payable

$180,000

Bonds payable

$9,000,000

(To record issue of bonds)

Aug 1

Bonds Payable

$6,000,000

Loss on redemption of bonds

$240,000

Discount on bonds payable

$120,000

Cash

$6,120,000

(To record redemption of bonds)

Working notes:

Bonds payable face value

$9,000,000

Issue price at 98% ($9,000,000 × 98%)

$8,820,000

Discount on issue of bonds

$180,000

Face value of bonds redeemed

$6,000,000

Less: Discount unamortized

$120,000

Net carrying value

$5,880,000

Redemption value ($6,000,000 × 102%)

$6,120,000

Loss on redemption of bonds

$240,000

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Most popular questions from this chapter

Under what conditions of bond issuance do a discount on bonds payable arise? Under what conditions of bond issuance does a premium on bonds payable arise?

(Issuance of Bonds between Interest Dates, Straight-Line, Redemption) Presented below are selected transactions on the books of Simonson Corporation.

May 1, 2017 Bonds payable with a par value of \(900,000, which are dated January 1, 2017, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2027. (Use interest expense account for accrued interest.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.)

Jan. 1, 2018 Interest on the bonds is paid.

April 1 Bonds with par value of \)360,000 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.

Instructions

(Round to two decimal places.)

Prepare journal entries for the transactions above.

Question: Zopf Company sells its bonds at a premium and applies the effective-interest method in amortizing the premium. Will the annual interest expense increase or decrease over the life of the bonds? Explain.

What is done to record properly a transaction involving the issuance of a non-interest -bearing long-term note in exchange for property?

(Issuance and Redemption of Bonds) Venezuela Co. is building a new hockey arena at a cost of \(2,500,000. It received a downpayment of \)500,000 from local businesses to support the project, and now needs to borrow \(2,000,000 to complete the project. It therefore decides to issue \)2,000,000 of 10.5%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2016.

(b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effective-interest method.

(c) Assume that on July 1, 2019, Venezuela Co. redeems half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this redemption.
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