Question

Banff corporation issued $500,000 of 8% callable (payable each June 30 and December 31), 5 year bonds on July 1, 2019 for net cash proceeds of $562,600 (ie: after considering the bond issue costs of $3,000 paid on issuance).

Their fiscal year end is December 31. On January 1,2020, the corporation exercised its call privilege and retired the bonds for $535,000.

Banff uses the effective interest method for amortization of any discount or premium and measures debt using the amortized cost basis.

REQUIRED:

a) Prepare the journal entries requires at (a) July 1, 2019; b) December 31, 2019 and c) January 1,2020.

b) How would your response change if Banff measured he debt using the fair value basis? Assume that the fair value on December 31, 2019/January 1, 2020 was $533,000. Provide journal entires for July 1, 2019, December 31, 2019 and January 1, 2020.

Answer 1

PAGE NO. DATE Journal entries Journal entry (Fair value) July 1, 2014 July 1, 2019 Bank Al - Dr 562,600. To 80% Bond aan to bomium Al 500,000 8497060 $65 600 Banc Al -M $62600 TO Bond All TO Transaction cast to Premi Dec. 31.2019 Intor est paid All то фамх or $20,000 820,000 Bank Al - 008565600 - TO 8% BOMU ALL $565600 Profits hess Al - on to interest pecia or All $20,000 420,000 Transaction cost Alcor $3000 - TO Bank ALL $3000 or $6560 $6560 Premium All TO 890 Bond Ak ( 65600x62 Dec 31, 2016 Interest paid Al - TO Bank ALC or 920,000 $ 20,000 Jon 5940 S9Mal 1,2000 Premium All - To golo Bond Alc e Bond Retine s hence premium amortised) Profit slows All Dr 823000 TO Interet peid All To Transaction cost All $ 200 $3000 on 1,2000 o 8ip Bond All - m 565600 to bain on Rettive Al to Bank Alc Sl. Bond All - Br 562600 to Gamon Rettu ALL 29600 TO Bank Al 533000 A Bond Refived s Grain booked) 32600 53300 ( being Bond Retine)