Question

Stilton Hotels Ltd. issued 10-year bonds on November 1, 2020, to finance the purchase of several new hotels. The bonds pay interest semi-annually on April 30 and October 31 every year. Stilton Hotels decided to retire some of the bonds on June 1, 2022. Stilton Hotels follows IFRS Other information pertaining to the issuance of the bonds follows: Face value of bonds $ 1,152,000 Coupon rate Effective interest rate 10% Percentage of bond issue that was retired 19% Price at which retired bonds were repurchased 99 8% Assume that Stilton Hotels has a December 31 year end, and that the company pays any interest accrued at the time debt is retired. Required: a) Prepare an amortization schedule for the first 2 years of the bond issue. b) Prepare the journal entry for the issuance of the bond on November 1, 2020. c) Prepare all journal entries after the issuance of the bond until December 31, 2021. d) Calculate the gain or loss on the partial retirement of the bonds on June 1, 2022. e) Prepare the journal entries to record the partial retirement of the bonds on June 1, 2022

Answer 1

Working notes: Based on PV table Amount PV factor at 5% 0.37689 12.46221 $1,152,000 $46,080 Face value-Bond Interest Issue price of Bond Face value of Bond Discount on issue of bonds PV of Cash flows $434,177 $574,259 $1,008,435 $1,152,000 $143,565 Cash interest is on face value of bond = $1,152,000*8%/2 = $46,080 a) Amortization table Effective-Interest Method Period interest Discount expense Amortization Period- Ending Cash Interest Paid November 1, 2020 April 30,2021 October 31, 2021 April 30,2022 October 31, 2022 $46,080 $46,080 $46,080 $46,080 $50,422 $50,639 $50,867 $51,106 $4,342 $4,559 $4,787 $5,026 Unamortized Discount $143,565 $139,223 $134,664 $129,877 $124,851 Carrying value $1,008,435 $1,012,777 $1,017,336 $1,022,123 $1,027,149 b) Credit Date Account Titles and Explanation November 1, 2020 Cash Discount on bonds payable Bond payable (To record issue of bonds) Debit $1,008,435 $143,565 $1,152,000 Debit $16,807 Date Account Titles and Explanation December 31, 2020 Interest expense Discount on bonds payable Interest payable (To record interest expense accrued) Credit $50,422/6*2 $1,447 $4,342/6*2 $15,360 $46,080/6*2 Credit Date April 30th, 2021 Account Titles and Explanation Interest expense Interest payable Discount on bonds payable Debit $33,615 $15,360 $50,422/6*4 $2,895 $4,342/6*4 $46,080 $46,080/6*2 Cash (To record interest expense paid) Credit Date October 31, 2021 Debit $50,639 Account Titles and Explanation Interest expense Discount on bonds payable Cash (To record interest expense paid) $4,559 $46,080 Debit $16,956 Date Account Titles and Explanation December 31, 2021 Interest expense Discount on bonds payable Interest payable (To record interest expense accrued) Credit $50,867/6*2 $1,596 $4,787/6*2 $15,360 $46,080/6*2 d) Carrying value of bond 30th April,2022 Add: Discount amortized for one month Carrying value of bond 1st June 2022 $194,203|19% of $1,022,123 $159 $5,026*19%/6 $194,362 Redemption value of bond Loss on redemption of bond (Redemption value - Carrying value) $216,691 $1,152,000*19%*99% $22,329 e) Date Credit June 1, 2022 Debit $218,880 $22,329 Account Titles and Explanation Bond payable Loss on redemption of bond Discount payable on bonds Cash (To record redemption of bonds) $24,518 $216,691 Credit Date June 1, 2022 Debit $1,618 Account Titles and Explanation Interest expense Discount payable on bonds Cash (To record Interest paid for one month) $159 $1,459