Question

E14.14 (LO 1, 2) (Entries for Redemption and Issuance of Bonds) On June 30, 2012, County Company issued 12% bonds with a par value of $800,000 due in 20 years. They were issued at 98 and were callable at 104 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, 2021, and to issue new bonds. New 10% bonds were sold in the amount of $1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

a.   Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2021.

b.   Prepare the entry required on December 31, 2021, to record the payment of the first 6 months' interest and the amortization of premium on the bonds

Answer 1

Answer:

Date	Account title & explanation	Debit ($)	Credit ($)
Old bond redemption:
June 30, 2021	12% Bonds payable	800,000
	Loss on retirement of bonds	40,800
	Cash		832,000
	Discount on bonds		8,800
	(To record redemption of old bonds)
New bond issue:
June 30, 2021	Cash (1,000,000 * 102/100)	1,020,000
	10% Bonds payable (1,000,000 * 100/100)		1,000,000
	Premium on bonds (1,000,000 * 2/100)		20,000
	(To record issue of new bonds at premium)

Working:

Calculation for unamortized discount as follows:

Discount at the time of issue	16,000
Less: Discount amortised till june 30, 2021 (16,000 / 40 * 18)	(7,200)
Unamortized discount	8,800

Here, 18 is period because interest is given two times in a year.

Calculation for loss on redemption as follows:

Redemption of bonds	832,000
Less: Carrying value (800,000 - 8,800)	(791,200)
Loss on redemption	40,800

b.

Date	Account title and explanation	Debit ($)	Credit ($)
Dec 31, 2021	Interest expense	49,500
	Premium on bonds payable (20,000 / 40)	500
	Cash (1,000,000 * 10% * 6/12)		50,000
	(To record the interest expense for 6 months)

Answer 2

E14.13 (LO 1 , 2)

Answer 3

E14.13 (LO 1 , 2)