Question

BSE 3120 Intermediate Accounting II In-Class Activities On January 1, 2015, Winnie, Inc. issued $1,000,000, 6% bonds when the market rate was 5%. Interest is payable semiannually on December 31 and June 30 with the bonds maturing on December 31, 2024. The bonds are callable at 102. On January 1, 2020, Winnie retired $600,000 of the bonds at the call price. At the time they retired the bonds, they also paid the accrued interest for those bonds retired. Winnie uses the straight-line method to amortize any discount or premium. Required: a. Prepare the journal entry to record the issuance of the bonds. b. Prepare any required journal entries for interest payments for the first year. c. Prepare all required entries to record the retirement of the bonds on December 31, 2019.

Answer 1

Bond term is from 1/1/15 to 31/12/24 so total of 10 years.

First we compute the premium as follows:

Year	Payments	Amount	discount factor	discounted cashflows
1-20	Interest	30,000.00	5% / 2 = 2.5% for 10*2 = 20 years 15.58916	467674.869
20	Principal	1,000,000.00	2.5% for 20th year => 0.610271	610270.943
				1077945.81

So premium of 77945.81 (ie 1077945.81- 1000000) to be amortized for 10*2 = 20 times .ie., 77945.81 / 20 = 3897.29

1. Issuance:

1/1/15	Cash a/c Dr	1,077,945.81
	To Bonds Payable		1000,000.00
	To Premium on Bonds		77945.81

2. Interest payment:

30/6/15	Interest expense a/c (Bal figure) Dr	26102.71
	Premium on Bonds a/c Dr (SLM)	3897.29
	To Cash a/c		30000.00
31/12/15	Interest expense a/c (Bal figure) Dr	26102.71
	Premium on Bonds a/c Dr (SLM)	3897.29
	To Cash a/c		30000.00

3. 5 years * 2 = 10 instalments amortized., So., Unamortized premium on callable bonds =>

77945.81 * (600,000/1,000,000) * 10 / 20 => 23,383.74

31/12/19	Bonds Payable a/c Dr	600,000.00
	Premium on Bonds a/c Dr	23383.74
	To Profit on Redemption of Bonds a/c (Balancing Figure)		11383.74
	To Cash a/c (102/100 * 600000)		612000