Question

Cheyenne Company issued its 9%, 25-year mortgage bonds in the principal amount of $2,970,000 on January 2, 2003, at a discount of $150,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.

On December 18, 2017, the company issued its 11%, 20-year debenture bonds in the principal amount of $4,240,000 at 103, and the proceeds were used to redeem the 9%, 25-year mortgage bonds on January 2, 2018. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.

(a) Prepare journal entries to record the issuance of (1) the 11% bonds and (2) the redemption of the 9% bonds. (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.)

No.	Date	Account Titles and Explanation	Debit	Credit
(1)	December 18, 2017
(2)	January 2, 2018

(b) Indicate the income statement treatment of the gain or loss from redemption.

The lossgain is reported as Ordinary GainOrdinary LossExtraordinary GainExtraordinary Loss .

Answer 1

(a) Prepare journal entries to record the issuance of (1) the 11% bonds and (2) the redemption of the 9% bonds Credit Debit 4,367,200 No. Date Account Titles and Explanation -1 December 18, 2017 Cash ( 4240,000/100 ) x 103 11 % Bond payable ( Face Value ) Premium on issue of bond payable (balance) $ $ 4,240,000 127,200 -2 January 2, 2018 2,970,000 178,800 $ 9% bond payable (face value) loss on redemption of bond (balance) Discount on bond payable (150,000/25) x 10 Cash( 2970,000 x 104%) $ $ 60,000 3,088,800 (b) Indicate the income statement treatment of the gain or loss from redemption. The loss on redemption of $ 178,800 will be transferred to income statement Please comment if you have any doubt Please give feedback