Question

Problem 14-04 Indigo Company issued its 7%, 25-year mortgage bonds in the principal amount of $3,090,000 on January 2, 2006, at a discount of $147,000, 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, 2020, the company issued its 11%, 20-year debenture bonds in the principal amount of $3,730,000 at 103, and the proceeds were used to redeem the 7%, 25-year mortgage bonds on January 2, 2021. 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 7% bonds.

Debit Credit No. Date Account Titles and Explanation (1) December 18, 2020 Cash 3,841,900 Bonds Payable 3,730,000 Premium on Bonds Pay: 111,900 (2) January 2, 2021 Bonds Payable 3,090,000 Loss on Redemption of Bor Discount on Bonds Payable Cash (b) Indicate the income statement treatment of the gain or loss from redemption. The is reported as

Answer 1

a) Journal entries are as attached with appropriate computations:

Date Dr./ Cr. Account Title December 18, 2020 Dr Cash CrB ond Payable Premium on bonds payable January 2, 2021 Dr Bond Payable Dr Loss on redemption of bond (Cr Debit Credit Explanation 3841900 $ 3,730,000*1.03 3730000 111900 3090000 182400 $ 147000 to be amortized over 25 years on straight line basis; thus, balance in discount on bonds payable account = $ 147000 58800/25 years * 10 remaining years 3213600 $3,090,000*1.04 Discount on bonds payable Cash

b) The "Loss on redemption of bond" is reported as "Other or Extraordinary Expense under Income statement"