Question

Headlands Ltd. sells $6.40 million of 9% bonds on June 1, 2020. The bonds pay interest on December 1 and June 1. The bonds’ due date is June 1, 2024. The bonds yield 8%. On October 1, 2021, Headlands buys back $1.28 million worth of bonds for $1.86 million, including accrued interest.

1. Prepare all of the relevant journal entries from the time of sale until the date indicated. For situation 2, prepare the journal entries through December 31, 2022. Assume that no reversing entries were made. Use the amounts arrived at from using the financial calculator. Use the effective interest method for discount and premium amortization. (Hint: Refer to Chapter 3 for tips on calculating.) (For calculation purposes, use 5 decimal places as displayed in the factor table provided and final answers to 0 decimal places, e.g. 5,275. Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

2. Prepare any necessary original amortization tables. (Hint: Refer to Chapter 3 for tips on calculating.) (Round answers to 0 decimal places, e.g. 5,275.)

Answer 1

Answer to Part 1)

                                                                                              Debit                          Credit

1^st June 2020      Bank A/c Debit                                     40 Million

                                                To 9% Bonds                   40 million

(Sale of Bond)

                                -------------------------------------

1^st June 2020      Outstanding Interest A/c Debit 32,00,000

                                                To Bank A/c 32,00,000

                (Interest Paid on 40 Million @8% Half Yearly)

                -------------------------------------------------------------

1^st Oct. 2021 Bonds A/c Debit                                      1.28 Million

                            Accrued Interest Debit to bank Debit 0.58 Million

                                                                To Bank 1.86 Million

  (New Bonds Purchased by Headlands Ltd.)

                ----------------------------------------------------------------