Question

On June 30, 2012, Pharoah Company issued 12% bonds with a par value of $860,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2020. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2021, and to issue new bonds. New 8% bonds were sold in the amount of $980,000 at 103; they mature in 20 years. Pharoah Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

(a)		Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2021.
(b)		Prepare the entry required on December 31, 2021, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds. please provide calculations. thank you. Account Titles and Explanation Debit Credit No. Date (a) June 30, 2021 Bonds Payable M0.000 Cash 894 400 (To record the redemption of the old issue) (To record the sale of the new issue)

Answer 1

Discount on issue of bonds	17200	=860000*(1-0.98)
Discount amortized for 9 years	7740	=17200*9/20
Unamortized discount	9460	=17200-7740
Cash paid for redemption	894400	=860000*1.04
Less: Carrying value of bonds	850540	=860000-9460
Loss on redemption	43860

Date	Account Titles and Explanation	Debit	Credit
June 30,2021	Bonds payable	860000
	Loss on redemption of bonds	43860
	Discount on Bonds payable		9460
	Cash		894400
	(To record the redemption of the old issue)
June 30,2021	Cash	1009400		=980000*1.03
	Bonds payable		980000
	Premium on Bonds payable		29400
	(To record the sale of the new issue)
b
December 31,2021	Interest expense	38465
	Premium on Bonds payable	735		=29400/20*6/12
	Cash		39200	=980000*8%*6/12