Question

transportation company reports under ASPE. it sold $1 500 000 of six years, 6% bonds on august 1 20X2. additional information on the bond issue is as follows:

bond date: february 1 20X2

maturity date: january 31, 20X2

yield rate: 4%

interest payment dates: july 31 and january 31

bond discount/premium amortization: straight-line method

brokerage fees paid from proceeds: $10 000 in bond issue cost

bond measurement: amortized cost method

required:

1) compute the amount the bonds would have sold for on August 1 20X2

2) record the bond issuance on August 1 20X2

3) prepare the adjusting journal entry on december 31, 20X2 (year end)

4) prepare the entry to record interest payment on january 31, 20X3

5) on july 31 20X5, after interest is paid, the company buys and retires 40% of the bond issue at 99. record bond retirement

6) how will the remaining bond appear on the financial position directly after retirement above?

Answer 1

1) Amount received = Half year interest * PVIFA(2%,11) + Par value * PVIF(2%,11)
(1500000*3%) * PVIFA(2%,11) + 1500000 * PVIF(2%,11)
(1500000*3%) * 9.7868 + 1500000 * 0.8043 = $1646856
2) journal entries:
Date	Acc Title	Debit $	Credit $
Aug 1, 20X2	Cash	1646856
	Premium on Bond payable		146856
	Bond payable		1500000
	(being issuance of the bond )
3)
Dec 31, 20X2	Interest expense	26375
	Premium on Bond payable	11125		(146856/11)*5/6
	Interest payable		37500
	(being interest expense made payable)
4)
jan 31, 20X3	Interest expense	5275
	Interest payable	37500
	Premium on Bond payable	2225		(146856/11)*1/6
	Interest payable		45000
	(being interest expense for first half year made with amortisation of premium)
5)
July 31, 20X5	Bond payable	600000		(1500000*40%)
	Premium on Bond payable	26701		(146856*5*0.4/11)
	Income on retirement of Bond		32701
	Cash		594000	(600000*0.99)
	(retirement of the 40% of bonds)
6) Balance Sheet abstract:
	Liabilities:
	Bond payable	900000
	Premium on Bond payable	40052