Question

1. On June 30, 2013, Cheyenne Limited issued 12.75% bonds with a par value of $790,000 due in 20 years. They were issued at 97 and were callable at 106 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, 2020, and to issue new bonds. New 10% bonds were sold in the amount of $1 million at 101; they mature in 20 years. The company follows ASPE and uses straight-line amortization. The interest payment dates are December 31 and June 30 of each year.

1. Prepare journal entries to record the retirement of the old issue and the sale of the new issue on June 30, 2020.

To record redemption of bonds payable

To record issuance of new bonds

2. Prepare the entry required on December 31, 2020, to record the payment of the first six months of interest and the amortization of the bond premium.

please give the current formula

Answer 1

	Please remember , whenever Bond relates question will come , be careful about
	DATES . Normally we noticed that Bond redemptipn in One particular date , Bond issue in other
	date . Plus Calculation of Interest amount in relates t0 Bond +Plus calculation of
	Bond loss while redemption , or issue at discounted prices etc.
	In below asnwer , you will notice all type of adjustment as discused abovr
	FIRST CASE -
	On June 30 , 2013
	Cheyenne limited issued 12.75% ( coupon rate) BOND with
	par value of $ 790,000 due for 20 years
	They were issued at 97
	So issued BOND at discount ( 100-97)/100				3%
	They callable Bond at 106
	BUT due to certain changes, they decided to CALL the entire
	issue on 30th June ,2020 and issue NEW BOND
	So we lapsed 7 year ( On June 30,2013- 30th June 2020)
	So We need to calculate DISCOUNT ON BOND PAYABLE
	While issuing time , We gave discount of 3%
	Face value of the Bond $			7,90,000
	Discount on Bonds Payable			23,700	a
	(Amortized base)
	($790000*3%)
	Number of Bond period			20	b
	Per year discounted ( Amortizedc cost) $			1,185	(a/b)
	Number of year lapsed			7
	Total discount			8,295	($1185/ year*7 Year)
	Journal Entries
	Details		Debit($)	Credit($)
	Bond Payable		7,90,000
	Loss on Bond Redemption		55,695		( Bal Number)
	Cash
	( redemption 106% on $ 790000)			8,37,400
	Discount on Bond Payable ( as per above working)			8,295
	Next step
	On June 30 , 2020
	They issued New BOND coupon rate 10% ----
	They sold $ 1 Mio($1000000 bond @ 101
	Journal Entries
	Details		Debit($)	Credit($)
	Cash		10,10,000
	($1000000*101%
	Bond Payable			10,00,000
	Premium on Bond payable			10,000

Answer B	Prepare JE, AS ON 31ST Dec 2020, first 6 months Interest + amortization of
	premium Bond
	So first period of 6 Months ...
	Premium on Bind payable
	Duration Yrs	20
	first calculation Month	6
	Premium on Bond payable $		500	Per year ($10000/20)
	Premium on Bond payable $ Monthly		250	($500/12*6)
	First Interest amount
	Face value $	10,00,000
	Coupon rate ( as mentioned )	10%
	first calculation Month	6
	Interest	50000	($1000000*10%*6/12)
	Journal Entries
	Details		Debit($)	Credit($)
	Interest Expenses		49,750
	Premium on Bond		250
	Cash			50,000
	( to account Interest + Premium bond amortization Payable