On January 1, 2015, Lenore, Inc. issued $800,000, 6% bonds when the market rate was 7%....
On January 1, 2015, Lenore, Inc. issued $800,000, 6% bonds when the market rate was 7%. Interest is payable semiannually on December 31 and June 30 with bonds maturing on December 31, 2024. The bonds are callable at 103. On December 31, 2018, Lenore retired $400,000 of the bonds at the call price. At the time they retired the bonds, they also paid the accused interest for those bonds retired.
Required:
a. Prepare the journal entry to record the issuance of the bonds.
b. Lenore uses the effective interest method to amortize any discount or premium. Prepare an amortization schedule for the bonds.
c. Prepare any required journal entries for interest payments for the first year - 2015.
d. Prepare all required entries to record the retirement of the bonds on December 31, 2018, including the payment of accrued interest.
Homework Answers
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| Part a. | Since stated rate is less than Market Rate, bonds have been issued at discount. | |||
| Issue price of Bond: | ||||
| Present Value of $800,000 | PVF n=20 period, i=3.5% | 0.5026 | $ 402,053 | |
| Present Value of $24, 000 | PVAF n=20 period, i=3.5% | 14.2124 | $ 341,098 | |
| (800000*6%*6/12) | ||||
| Issue Price of Bond | $ 743,150 | |||
| Journal Entry: | ||||
| Date | Account | Debit | Credit | |
| Jan 1 2015 | Cash | $ 743,150 | ||
| Discounts on Bond payable | $ 56,850 | |||
| Bond Payable | $ 800,000 | |||
| (being bond issued at discount) | ||||
| Part b. | ||||
| Year | Cash 3% of 800,000 | Interest | Amortization | Carrying |
| Jan 1 2015 | $ 56,850 | $ 743,150 | ||
| Jun 30 2015 | $ 24,000 | $ 26,010 | $ 2,010 | $ 745,160 |
| Dec 31 2015 | $ 24,000 | $ 26,081 | $ 2,081 | $ 747,241 |
| Jun 30 2016 | $ 24,000 | $ 26,153 | $ 2,153 | $ 749,394 |
| Dec 31 2016 | $ 24,000 | $ 26,229 | $ 2,229 | $ 751,623 |
| Jun 30 2017 | $ 24,000 | $ 26,307 | $ 2,307 | $ 753,930 |
| Dec 31 2017 | $ 24,000 | $ 26,388 | $ 2,388 | $ 756,317 |
| Jun 30 2018 | $ 24,000 | $ 26,471 | $ 2,471 | $ 758,789 |
| Dec 31 2018 | $ 24,000 | $ 26,558 | $ 2,558 | $ 761,346 |
| Jun 30 2019 | $ 24,000 | $ 26,647 | $ 2,647 | $ 763,993 |
| Dec 31 2019 | $ 24,000 | $ 26,740 | $ 2,740 | $ 766,733 |
| Jun 30 2020 | $ 24,000 | $ 26,836 | $ 2,836 | $ 769,569 |
| Dec 31 2020 | $ 24,000 | $ 26,935 | $ 2,935 | $ 772,504 |
| Jun 30 2021 | $ 24,000 | $ 27,038 | $ 3,038 | $ 775,541 |
| Dec 31 2021 | $ 24,000 | $ 27,144 | $ 3,144 | $ 778,685 |
| Jun 30 2022 | $ 24,000 | $ 27,254 | $ 3,254 | $ 781,939 |
| Dec 31 2022 | $ 24,000 | $ 27,368 | $ 3,368 | $ 785,307 |
| Jun 30 2023 | $ 24,000 | $ 27,486 | $ 3,486 | $ 788,793 |
| Dec 31 2023 | $ 24,000 | $ 27,608 | $ 3,608 | $ 792,401 |
| Jun 30 2024 | $ 24,000 | $ 27,734 | $ 3,734 | $ 796,135 |
| Dec 31 2024 | $ 24,000 | $ 27,865 | $ 3,866 | $ 800,000 |
| Part c. | ||||
| Date | Account | Debit | Credit | |
| Jun 30 2015 | Interest Expense | $ 26,010 | ||
| Discounts on Bond payable | $ 2,010 | |||
| Cash | $ 24,000 | |||
| (being interest for first half posted) | ||||
| Dec 31 2015 | Interest Expense | $ 26,081 | ||
| Discounts on Bond payable | $ 2,081 | |||
| Cash | $ 24,000 | |||
| (being interest for Second half posted) | ||||
| Part d. | ||||
| Date | Account | Debit | Credit | |
| Dec 31 2018 | Bond Payable | $ 800,000 | ||
| Loss on Retirement of Bond | $ 62,654 | |||
| Discounts on Bond payable (unamortized) | $ 38,654 | |||
| Cash (800000/100*103) | $ 824,000 | |||
| (being bond retired) | ||||
| Loss on Retirement of Bond: | ||||
| Carrying value of Bondas on Dec 31 2018 | $ 761,346 | |||
| Less: Call value | $ 824,000 | |||
| Loss | $ -62,654 | |||
| Unamortized Discount: | ||||
| Carrying value of Bondas on Dec 31 2018 | $ 761,346 | |||
| Less: Bond Face Value | $ 800,000 | |||
| Discounts on Bond payable (unamortized) | $ -38,654 | |||
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