Question

On April 1, 2017, Teal Company sold 13,500 of its 11%, 15-year, $1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2018, Teal took advantage of favorable prices of its stock to extinguish 6,300 of the bonds by issuing 207,900 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $31 per share on March 1, 2018.

Prepare the journal entries needed on the books of Teal Company to record the following. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

(a)		April 1, 2017: issuance of the bonds.
(b)		October 1, 2017: payment of semiannual interest.
(c)		December 31, 2017: accrual of interest expense.
(d)		March 1, 2018: extinguishment of 6,300 bonds. (No reversing entries made.)

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	4/1/17
(b)	10/1/17
(c)	12/31/17
(d)	3/1/18
		(To record payment to retiring bondholders)
	3/1/18
		(To record extinguishment of the bonds)

Answer 1

No.	Date	Account Titles and Explanation	Debit	Credit
(a)	42826	Cash (13500*1000*97%)	13095000
		Discount on bonds payable	405000
		Bonds Payable (13500*1000)		13500000
(b)	43009	Interest Expense (13500+742500)	742500
		Discount on bonds payable (405000/(15 years * 2))		13500
		Cash (13500,000*11%*1/2)		742500
(c)	43100	Interest Expense	378000
		Discount on bonds payable (13500/2)		6750
		Interest Payable (13500,000*11%*3/12)		371250
(d)	43160	Interest Payable (371250/13500*6300)	173250
		Interest Expense	117600
		Discount on bonds payable ((6750/3*2)/13500*6300)		2100
		Cash		288750
		((742500/6 months*5 months)/13500 bonds *6300)
		(To record payment to retiring bondholders)
(d)	43160	Bonds Payable (6300*$1000)	6300000
		Loss on bond redemption	322350
		Discount on bonds payable (Working)		177450
		Common Stock (207900 shares x $10)		2079000
		Additional paid in capital (207900 shares x( $31-10))		4365900
		(To record extinguishment of the bonds)

Working:

Discount on Bonds Payable =

Discount on 6300 bonds = =405000/13500*6300 = $189000

Discount for 1 month = $189000 / 30 = $1050 per month

Unamortized discount for 169 months (180-11) months = $1050*169 = $177450