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Chapter 14: Q.14-15E (page 757)

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)

Short Answer

Expert verified

Answer:

Loss on redemption is$22,000.

Step by step solution

01

Meaning of Redemption of Bonds

When afixed income investment matures, and you get your investment amount back, the repayment is known as redemption. In other words,Redemption of bonds means repayment of a debt security or preferred stock issue at or before maturity, at par, or a premium price.

02

Computation of the gain or loss

Given,

Face value = $300,000

Unamortized discount = $10,000

Particulars
Amount ($)

Reacquisition price ($300,000 × 104%)

$312,000

Less: Net carrying amount of bonds redeemed

Par value

$300,000

Unamortized discount

($10,000)

$290,000

Loss on Redemption

$22,000

03

Recording of refunding transactions

Transactions

Accounts Titles and Explanations

Debit

Credit

1

Bonds payable

$300,000

Loss on Redemption

$22,000

Discount on bonds payable

$10,000

Cash

$312,000

2

Cash

$309,000

Premium on bonds payable

$9000

Bonds payable

$300,000

Explanations:

1)Bonds payable = $300,000 (Given)

Loss on Redemption = $22,000 (Computed above)

Discount on bonds payable = $10,000 (Given)

Cash = ($300,000 × 104%) = $312,000

2) Cash = ($300,000 × 103%) = $309,000

Premium on bonds payable = ($309,000 -$300,000 = $9000

Bonds payable = $300,000 (Given)

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Most popular questions from this chapter

Vargo Corp. owes \(270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2017. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2019, reduce the principal to \)220,000, and reduce the interest rate to 5%, payable annually on December 31.

Instructions

  1. Prepare the journal entries on Vargo’s books on December 31, 2017, 2018, 2019.
  2. Prepare the journal entries on First Trust’s books on December 31, 2017, 2018, 2019.

(Amortization Schedule—Effective-Interest) Assume the same information as E14-6.

Instructions

Set up a schedule of interest expense and discount amortization under the effective-interest method. (Hint: The effective-interest rate must be computed.)

Describe the two criteria for determining the valuation of financial assets.

Assume the same information as in E14-4, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%

Instructions

Prepare the journal entries to record the following. (Round to the nearest dollar.)

(a) The issuance of the bonds.

(b) The payment of interest and related amortization on July 1, 2017.

(c) The accrual of interest and the related amortization on December 31, 2017.

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.
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