Question

Effective April 1, 2016. ABC Inc, which has a year-end of December 31st, authorized $1500000 of callable, mortgage bonds (secured by 2200000 of property and equipment at market value ). The bond paid interest at a rate of 8% per year and had a term of 6 year. Interest way payable each September 30th and march 31st.

On July 1, 2017 ABC INC issued 1000 of the bonds in exchange for cash in the total amount of $906000. On October 1, 2019, ABC called the bond and paid the current bond holders $1,150,000 in cash.

prepare the journal entries related to the bonds that the INC entered into its records during the April 1 2016 to Dec 31 2017.

In addition, prepare the journal entry that was recorded when the bonds were redeemed in oct 2019

Answer 1

No entires will be made in books of accounts when the share capital / bonds is authorized. Entries are made during the issue, redemption and payment of interest.

Hence the entry to be passsed on On July 1, 2017 in the books of ABC INC are as follows,

Bank Account Dr.                                      $906,000

Discount of issue of debnture Dr.                 $234,000

To 8% Bonds A/c                                                      $1,000,000

To premium on redemption of account                              150,000

( Being assumed that the face value of a bonds $1000/-, as the sum collected is only $906,000/-, the balance is considered as discount on issue of bonds). ( Liability is created for payment of premium on redemption, it is assumed that the redemption value is mentioned in advance)

Entry to be passed on 30th Sep 2017 ( 3 months interest).

Interest paid on bonds A/c Dr.             $20,000

To interest payable to bond holders                 $20,000

(Being provision made for payment of interest) (1,000,000*8%*3/12)

Interest payable to bond holder Dr.    $20,000

To Bank Account.                                      $20,000

(being payment of interest)

Entries to be passed on March 2018, Sep 2018, Mar 2019, Sep 2019 are as follows,

nterest paid on bonds A/c Dr.             $40,000

To interest payable to bond holders                 $40,000

(Being provision made for payment of interest) (1,000,000*8%*6/12)

Interest payable to bond holder Dr.    $40,000

To Bank Account.                                      $40,000

(being payment of interest)

Entries to passed for redemption of bonds on 1st Oct 2019 are as follows,

8% Bonds A/c Dr.                                                $1,000,000

premium on redemption of account                           $150,000

To Bank A/c                                                               $1,150,000/-

(Debentures redemed at premium)