Question

f. What is the 3. What she bat is the economic value of the band the should the ability valstand the 2011, the maturity date of the bond record the retirement of the bod 1. 2011. the mat h. Prepare the Prepare the entry to record the P12-4. Assume that on June 30, 2009.market interest ae meae P12-5 Refer to P12-4. A Required: a. Compute the eco b. Comment on any y 1. anuary 11 e d nuary 1 sute the economic value of the bonds on June 30.00 moment on any accounting adjustments required by o n Corporatiewe of the change in market interest rates What entry would be made by O'Brien if it retired the bonds on June 30.2007.be surchasing the bonds in the open market? Explain why the action taken in part (c) may not be in the best interests of Bens er 2000 pment in ad c. What en purchasing the d. Explain why stockholders. Quary P12-6 The followin sell - 10 coupon bond, issued ally). The bond was i be following is the discount amortization schedule for a $1,000 face, 6% semiannual on bond, issued when the market interest rate was 10 (compounded semianna The bond was issued on January 1, 2001, and matures on December 31, 2005, To Beginning Balance Interest Expense $ 46.14 46.45 46.77 47.11 From 1/1/01 6/30/01 7/1/01 12/31/01 1/1/02 6/30/02 7/1/02 12/31/02 1/1/03 6/30/03 7/1/03 12/31/03 1/1/04 6/30/04 7/1/04 12/31/04 1/1/056 /31/05 7/1/05 12/31/05 Totals $922.78 928.92 935.36 942.13 949.24 956.70 9 64 964.54 972.76 981.40 990.47 Coupon Discount Payment Amortization Balance Ending $ 40.00 $ 6.14 5928.92 40.00 6.45 935.36 40.00 6.77 942.13 40.00 7.11 1949.24 47.46 40.00 7.46 956.70 47.84 40.00 7.84 964.54 48.23 40.00 8.23 972.76 48.64 40.00 8.64 981.40 49.07 40.00 9.07 990.47 49.52 40.00 9.52 1,000.00 $477.22 $400.00 $77.22 Required: rozbroda. If the bond is retired at maturity, what entry would be made? b. Suppose the company purchased the bond from its holder on June 30, 2003, for $935.00. What entry would be made to retire the bonds? c. Suppose that the bond was retired on January 1, 2003, by purchasing it in the market for $1,000. What entry would be made to retire the bonds? d. What are the GAAP accounting treatments for bonds retired before their maturity date? Discuss the significance of these rules and why they exist. P12-7 Radley Corporation issued $800.000 face-value, 10% coupon, 10-year bonds on January 1, 2001. The bonds pay interest semiannually and were sold to yield 8%. The final selling price was $908,723. Assume that the market rate of interest stays at 8% (compounded semiannu- ally) over the 10-year period. Required: Cynlain what factors would cause the bonds to sell at a premium.

P12-6

(a)through (D)

Answer 1

P12 - 6

Solution:

Journal entries

	Date	General Journal	Debit	Credit
a)	12/31/2005	Bonds Payable	$1,000
		Cash		$1,000
		(To record retirement of bonds)
b)	6/30/2003	Bonds Payable	$1,000.00
		Discount on Bonds Payable (Unamortized Portion = $1,000 face value – Book Value as on 6/30/03 956.70)		$43.30
		Cash		$935.00
		Profit/Gain on Retirement of Bonds (balancing figure)		$21.70
		(To record retirement of bonds at $935)
c)	1/1/2003	Bonds Payable (face value)	$1,000.00
		Loss on Retirement of Bonds (balancing figure)	$50.76
		Discount on Bonds Payable (Unamortized Portion = Face value $1,000 – Book Value as on 1/1/03 949.24)		$50.76
		Cash		$1,000.00
		Profit/Gain on Retirement of Bonds (balancing figure)
		(To record retirement of bonds at $1,000)

d)

Accounting treatment for early retirement of bonds

If bonds are retired early before its maturity date, the loss or profit is recognized on retirement of bonds. There may be three situations

1. If carrying value is less than retiring value, loss on retirement of bonds would be recorded
2. If carrying value is more than retiring value, gain on retirement would be recorded

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