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Chapter 12: Q10SE_1 (page 657)

Retiring bonds payable before maturity

On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds

payable

at 102. Powell Company has extra cash and wishes to retire the bonds payable

on

January 1, 2019, immediately after making the second semiannual interest

payment. To

retire the bonds, Powell Company pays the market price of 98.

Requirements

1. What is Powell Company鈥檚 carrying amount of the bonds payable on the

retirement

date?

2. How much cash must Powell Company pay to retire the bonds payable?

3. Compute Powell Company鈥檚 gain or loss on the retirement of the bonds

payable.

Short Answer

Expert verified

Answer:

The carrying amount of the bonds on retirement is $348,600.

Step by step solution

01

Definition of bond maturity

The due date of the bonds is known as the maturity of the bonds.

02

Calculation of the bond amortization

Premium on bonds = $7,000

Amortizationofbonds=AmountofpremiumNumberofperiods=$7,00010=$700

Hence the semi-annual amortization of the bods is $700.

Annual bond amortization is $1,400

03

calculation of the carrying amount

Carrying amount of the bonds
Face Value of Bonds
$350,000

Add: The first-year bond amortization
($1,400)

Carrying amount on the retirement of bonds

$348,600

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Most popular questions from this chapter

Journalizing liability transactions and reporting them on the balance sheet

The following transactions of Great Value Pharmacies occurred during 2018 and 2019:

2018

Mar. 1 Borrowed \(390,000 from Bartow Bank.The six-year, 13% note requires payments due annually, on March 1. Each payment consists of \)65,000 principal plus one year鈥檚 interest.

Dec. 1 Mortgaged the warehouse for \(350,000 cash with Saylor Bank. The mortgagerequires monthly payments of \)7,000. The interest rate on the note is 9% andaccrues monthly. The first payment is due on January 1, 2019.

31 Recorded interest accrued on the Saylor Bank note.

31 Recorded interest accrued on the Bartow Bank note.

2019

Jan. 1 Paid Saylor Bank monthly mortgage payment.

Feb. 1 Paid Saylor Bank monthly mortgage payment.

Mar. 1 Paid Saylor Bank monthly mortgage payment.

1 Paid first installment on note due to Bartow Bank.

Requirements

1. Journalize the transactions in the Great Value Pharmacies general journal. Roundto the nearest dollar. Explanations are not required.

2. Prepare the liabilities section of the balance sheet for Great Value Pharmacies onMarch 1, 2019 after all the journal entries are recorded.

Analyzing and journalizing bond transactions

On January 1, 2018, Educators Credit Union (ECU) issued 8%, 20-year bonds payablewith face value of $1,000,000. These bonds pay interest on June 30 and December 31.The issue price of the bonds is 109.Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.

Journalizing liability transactions and reporting them on the balance

sheet

The following transactions of Johnson Pharmacies occurred during 2018 and 2019:

2018

Mar. 1 Borrowed \(450,000 from Coconut Creek Bank. The 15-year, 5% note requires

payments due annually, on March 1. Each payment consists of \)30,000 principal

plus one year鈥檚 interest.

Dec. 1 Mortgaged the warehouse for \(250,000 cash with Saputo Bank. The mortgage

requires monthly payments of \)8,000. The interest rate on the note is 12% and

accrues monthly. The first payment is due on January 1, 2019.

31 Recorded interest accrued on the Saputo Bank note.

31 Recorded interest accrued on the Coconut Creek Bank note.

2019

Jan. 1 Paid Saputo Bank monthly mortgage payment.

Feb. 1 Paid Saputo Bank monthly mortgage payment.

Mar. 1 Paid Saputo Bank monthly mortgage payment.

1 Paid first installment on note due to Coconut Creek Bank.

Requirements

1. Journalize the transactions in the Johnson Pharmacies general journal. Round to

the nearest dollar. Explanations are not required.

2. Prepare the liabilities section of the balance sheet for Johnson Pharmacies on

March 1, 2019 after all the journal entries are recorded.

What is an annuity?

Reporting current and long-term liabilities

Pediatric Dispensary borrowed \(390,000 on January 2, 2018, by issuing a 15% serial

bond payable that must be paid in three equal annual installments plus interest for the

year. The first payment of principal and interest comes due January 2, 2019. Complete

the missing information. Assume the bonds are issued at face value.

December 31

2018 2019 2020

Current Liabilities:

Bonds Payable \) \( \)

Interest Payable

Long-term Liabilities:

Bonds Payable
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