Question

On June 30, 2010, Ayayai Limited issued 13.50% bonds with a par value of $768,000 due in 20 years. They were issued at 99 and were callable at 102 at any date after June 30, 2017. 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, 2017 and to issue new bonds. New 10% bonds were sold in the amount of $1 million at 102; they mature in 20 years. The company follows ASPE and uses straight-line amortization. The interest payment dates are December 31 and June 30 of each year.

a)Prepare journal entries to record the retirement of the old issue and the sale of the new issue on June 30, 2017. b)Prepare the entry required on December 31, 2017 to record the payment of the first six months of interest and the amortization of the bond premium.

Answer 1

(a)	Particulars	$	$
	Reacquisition price [768000*102%]		783360
	Less: Net carrying amount of bonds redeemed
	Par value	768000
	Less: unamortized Discount	-4992	763008
	[768000*1%*13/20]
	Loss on redemption		20352
Date	General description	Debit	credit
June 30 2017	Bonds Payable	763008
	Loss on redemption on Bonds	20352
	cash		783360
	Cash [1,000,000*102%]	1020000
	Bonds Payable		1020000
(b)
Dec 31 2017	Interest expense	49500
	Bonds Payable [1/40*$20000]	500
	cash [1,000,000*5%]		50000