Question

On January 1, 2011, Gray Company issued $500,000 of 5-year, 3% bonds for $470,000, their interest payable semiannually every June 30 and December 31. Gray uses straight-line amortization, having judged the difference under the effective-interest method to be immaterial.

Scenario #1

On April 30, 2015, Gray retired all of the bonds at 101. Prepare the bond-related journal entry(s) Gray should have made on April 30, 2015.

Scenario #2

On April 30th 2015, Gray retired $100,000 of the bonds at 98. Prepare the bond-related journal entry(s) Gray should have made on (1) April 30, 2015, and (2) June 30, 2015, and the display of the bonds as they should appear in Gray's mid-year balance sheet.

Answer 1

Journal Entries
Scenario #1
Date	S.No.	Particulars	Debit	Credit
30.04.2015	1	3% Bonds A/c Dr.	500000
		Interest Expense A/c Dr.	5000
		Premium on Redemption A/c Dr.	5000
		Profit and Loss A/C Dr.	6000
		To Discount on Issue A/c		6000
		To Bank A/c		510000
		(being Interest on Bond for 4 months paid, discount on issue for the last year amortized and 3% $500000 Bonds redeemed)
	2	Profit and Loss A/c Dr.	10000
		To Premium on Redemption A/c		5000
		TO Interest Expense		5000
Scenario #2
Date
30.04.2015	1	3% Bonds A/c Dr.	100000
		Interest Expense A/c Dr.	1000
		To Bank A/c		99000
		To Discount on Redemption A/c		2000
		(Being 3% $100000 Bonds redeemed and interest for 4 months paid along with it)
	2	Discount on Redemption A/c Dr.	2000
		To Discount on Issue A/c		1200
		To Profit and Loss A/c		800
		(Being remaining Discount on issue for $100000 Bonds amortized and discount on redemption transferred to P&L A/c)
30.06.2015	1	Interest Expense A/c Dr.	6000
		To Bank A/c		6000
		(Being interest on remaining 3% $400000 Bonds paid)
	2	Profit and Loss A/c Dr.	8400
		To Interest Expense A/c		6000
		To Discount on Issue A/c		2400
		(Being Interest expense and remaining discount on issue amortized for half year ending as on 30.06.2015)

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Borrowings	$400000
(3% $400000 Bonds)