Question

***Please explain how to get

•interest payable

•discount on bonds payable

•loss on redemption of bonds

Ex. 14-106—Retirement of bonds. Prepare journal entries to record the following retirement. (Show computations and round to the nearest dollar.) The December 31, 2007 balance sheet of Marin Co. included the following items: 7.5% bonds payable due December 31, 2015 $1,200,000 Unamortized discount on bonds payable 48,000 The bonds were issued on December 31, 2005 at 95, with interest payable on June 30 and December 31. (Use straight-line amortization.) On April 1, 2008, Marin retired $240,000 of these bonds at 101 plus accrued interest. Solution 14-106 Interest Expense 4,800 Cash ($240,000 x 7.5% 3/12) 4,500 Discount on Bonds Payable ($48,000 1/5 1/8 * 3/12) 300 Bonds Payable 240,000 Loss on Redemption of Bonds 11,700 Discount on Bonds Payable [(1/5 ~ $48,000) - $300] 9,300 Cash 242,400

Answer 1

Interest Expenses of retired bonds Retired Bonds will be outstanding from 1 January 2008 to 1 April 2008, i.e., for 3 months Therefore interest of 3 months will be accrued on bonds of value $ 240000, afterwards bonds are retired so no interest will be payable on them. Interest of 3 months = $ 240000 * 7.5% * 3 months for which Bonds are outstanding / 12 months Interest Exp = 4500 will be paid by cash And, unamortize discount on bonds payable has balance $ 48000. Therefore unamortize discount on bonds payable of value $ 240000 will be = ( 48000 Unamortize balance/ 1200000 Total Bond Value) * 240000 unamortize discount on bonds payable of value $ 240000 will be = $9600 Remaining life of bonds on which amortization of discount will be done = 8 years ( 1 Jan 2008 to 31 Dec 2015) Total amortization of discount on bonds payable of value $ 240000 for 2008 year will be = $9600/8 = $ 1200 out of which , 3months of unamortize balance will be debited as Interest Expense as Bonds were outstanding for those 3 months = $ 1200*3/12 = $300 Therefore Interest Exp. Will be debited by $ 4500 for Interest paid in cash and $ 300 for amortization of discount payable on Bonds for 3 months

Second entry is about retirement of bonds of value $ 240000 Bonds of value $ 240000 are retired, so Bonds payable account is debited by $ 240000 No. of Bonds retired = $240000 / 100 par value = 2400 bonds Cash Paid for each bond = 2400 bonds * 101 = 242400 Total unamortize discount payable amount for $ 240000 bonds = $9600 - $ 300 ( booked as interest exp. Earlier ) = $ 9300 Therefore, Bonds of par value retired = $ 240000 Less :unamortize discount payable on such value = $ 9300 Less : Cash Paid for such bonds = $ 242400 Remaining = $ 11700 = will be loss on redemption on bonds.

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