Question

On June 1. 2017. Picasa, Inc. issued $8,000,000, 6% bonds for $7,841,000, with includes accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds maturing on February 1, 2027.

Picasa uses the straight line method for amortization.

On February 1, 2019, Picasa re-purchased $5,000,000 of the bonds at 102.

Prepare the journal entry to record the repurchase of the bonds.

Answer 1

Note: The last journal entry is the one required however all earlier entries have been shown for better understandability.

Date	General Journal	Debit	Credit
June 1, 2017	Cash	7841000
	Discount on bonds payable	319000
	Bonds payable		8000000
	Interest expense ($8000000 x 6% x 4/12)		160000
Aug. 1, 2017	Interest expense	245500
	Discount on bonds payable ($319000 x 2/116)		5500
	Cash ($8000000 x 6% x 6/12)		240000
Feb. 1, 2018	Interest expense	256500
	Discount on bonds payable ($319000 x 6/116)		16500
	Cash ($8000000 x 6% x 6/12)		240000
Aug. 1, 2018	Interest expense	256500
	Discount on bonds payable ($319000/20)		16500
	Cash ($8000000 x 6% x 6/12)		240000
Feb. 1, 2019	Interest expense	256500
	Discount on bonds payable ($319000/20)		16500
	Cash ($8000000 x 6% x 6/12)		240000
Feb. 1, 2019	Bonds payable	5000000
	Loss on redemption of bonds	265000
	Discount on bonds payable*		165000
	Cash ($5000000 x 102/100)		5100000
	(To record the repurchase of the bonds)

*Discount on bonds payable = [$319000 - ($5500 + $16500 + $16500 + $16500)] x $5000000/$8000000 = $264000 x $5000000/$8000000 = $165000