Question

roblem 14-7

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On April 1, 2017, Martinez Company sold 23,400 of its 11%, 15-year, $1,000 face value bonds at 96. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2018, Martinez took advantage of favorable prices of its stock to extinguish 5,400 of the bonds by issuing 178,200 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $31 per share on March 1, 2018.

Prepare the journal entries needed on the books of Martinez Company to record the following. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(a)		April 1, 2017: issuance of the bonds.
(b)		October 1, 2017: payment of semiannual interest.
(c)		December 31, 2017: accrual of interest expense.
(d)		March 1, 2018: extinguishment of 5,400 bonds. (No reversing entries made.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	4/1/17
(b)	10/1/17
(c)	12/31/17
(d)	3/1/18
		(To record payment to retiring bondholders)
	3/1/18
		(To record extinguishment of the bonds)

Answer 1

Answer :

Date	Particulars	L.F	Amount ($)	Amount ($)
2017
Apr 01	Cash (23,400*96)		2012400
	Unamortized bond discount		2,13,87,600
	Bond payable			2,34,00,000
	(For bonds issued)
Oct.01	Interest expense		19,99,920
	Unamortized bond discount			7,12,920
	Cash			12,87,000
	For interest paid on 5.5% bonds and amortization of discount for half year)
Dec 31	Interest expenses		9,99,960
	Unamortized bond discount			3,56,460
	Interest payable			6,43,500
	(For interest accrued on 5.5% bonds and amortization of discount for 3 months)
2018
Mar 01	Interest expenses		9,99,960
	Interest payable		6,43,500
	Unamortized bond discount			3,56,460
	Cash			12,87,000
	(For interest paid on 5.5% bonds and amortization of discount for half year)
Mar 01	Bond payable (5,4000*1000)		54,00,000
	Unamortized bond discount		46,06,560
	Common stock (178,200*10)			1782000
	Additional paid in capital (178,200*21)			3742200
	Gain on extinguishment of bond			44,82,360
	(For bond extinguished)

Working Note :

Calculation of Unamortized
4935600	5400/23400*21,387,600
164520	4,935,600/30
164520	4,935,600/30
4606560	4,935,600 - 164,520 - 164,520