Question

The long-term liability section of Eastern Post Corporation’s balance sheet as of December 31, 2020, included 12% bonds having a face amount of $41.6 million and a remaining premium of $6.4 million. On January 1, 2021, Eastern Post retired some of the bonds before their scheduled maturity.

Required:

Prepare the journal entry by Eastern Post to record the redemption of the bonds under each of the independent circumstances below:

1. Eastern Post called half the bonds at the call price of 104 (104% of face amount).
2. Eastern Post repurchased $10.4 million of the bonds on the open market at their market price of $10.9 million.

Answer 1

1. Eastern Post called half the bonds at the call price of 104 (104% of face amount).

Carrying amount of the bonds at December 31, 2010 = $41.6 million + $6.4 million = $48m, so half of that is $24m. Selling price was at 104, so proceeds from the sale = $20.8m x 104% = $21.632m, so there's a gain of $24m - $21.632m or $2.368m

Dr Bonds payable $20.8m

Dr Premium on bonds payable $3.2m

Cr Cash $21.632m

Cr Gain on redemption of bonds $2.368m

2.

Eastern Post repurchased $10.4 million of the bonds on the open market at their market price of $10.9 million

You're repurchasing $10.4 m out of $41.6m here, so remember to use only 25% of the amounts given to you in the question.

Dr Bonds payable $10.4m

Dr Premium on bonds payable $1.6m

Cr Cash $10.9m

Cr Gain on redemption of bonds $1.1m