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Chapter 14: 13E (page 756)

(Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding \(6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued \)9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.

Instructions

Prepare the journal entries necessary to record issue of the new bonds and refunding of the bonds.

Short Answer

Expert verified

Discount on issue of bonds $180,000

Loss on redemption of bonds $240,000

Step by step solution

01

Meaning of Bonds

Bonds are long-term financial debt instruments issued by a company for which the company pays interest to the bondholders and repays the borrowed amount after a specific period. A company can issue bonds at par, premium, or discount.

02

Journal Entries

Date

Accounts Titles and Explanations

Debit

Credit

July 1

Cash

$8,820,000

Discount on Bonds Payable

$180,000

Bonds payable

$9,000,000

(To record issue of bonds)

Aug 1

Bonds Payable

$6,000,000

Loss on redemption of bonds

$240,000

Discount on bonds payable

$120,000

Cash

$6,120,000

(To record redemption of bonds)

Working notes:

Bonds payable face value

$9,000,000

Issue price at 98% ($9,000,000 脳 98%)

$8,820,000

Discount on issue of bonds

$180,000

Face value of bonds redeemed

$6,000,000

Less: Discount unamortized

$120,000

Net carrying value

$5,880,000

Redemption value ($6,000,000 脳 102%)

$6,120,000

Loss on redemption of bonds

$240,000

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Most popular questions from this chapter

(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a 鈥渄ebtor in possession,鈥� he has negotiated the following revised loan agreement with United Bank. Perkins Inc.鈥檚 \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.

Instructions

(a) What is the accounting nature of this transaction?

(b) Prepare the journal entry to record this refinancing:

(1) On the books of Perkins Inc.

(2) On the books of United Bank.

(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.

Donald Lennon is the president, founder, and majority owner of Wichita Medical Corporation, an emerging medical technology products company. Wichita is in dire need of additional capital to keep operating and to bring several promising products to final development, testing, and production. Donald, as owner of 51% of the outstanding stock, manages the company鈥檚 operations. He places heavy emphasis on research and development and long-term growth. The other principal stockholder is Nina Friendly who, as a nonemployee investor, owns 40% of the stock. Nina would like to deemphasize the R & D functions and emphasize the marketing function to maximize short-run sales and profits from existing products. She believes this strategy would raise the market price of Wichita鈥檚 stock.

All of Donald鈥檚 personal capital and borrowing power is tied up in his 51% stock ownership. He knows that any offering of additional shares of stock will dilute his controlling interest because he won鈥檛 be able to participate in such an issuance. But, Nina has money and would likely buy enough shares to gain control of Wichita. She then would dictate the company鈥檚 future direction, even if it meant replacing Donald as president and CEO.

The company already has considerable debt. Raising additional debt will be costly, will adversely affect Wichita鈥檚 credit rating, and will increase the company鈥檚 reported losses due to the growth in interest expense. Nina and the other minority stockholders express opposition to the assumption of additional debt, fearing the company will be pushed to the brink of bankruptcy. Wanting to maintain his control and to preserve the direction of 鈥渉is鈥� company, Donald is doing everything to avoid a stock issuance and is contemplating a large issuance of bonds, even if it means the bonds are issued with a high effective-interest rate.

Instructions

(a) Who are the stakeholders in this situation?

(b) What are the ethical issues in this case?

(c) What would you do if you were Donald?

Celine Dion company issued $600,000 of 10%, 20- year bonds on January 1, 2017, at 102. Interest is payable semiannually on July 1 and January 1. Dion company uses the straight-line method of amortization for bond premium or discount.

Instructions:

Prepare the journal entries to record the following.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2017.
  3. The accrual of interest and the related amortization on December 31, 2017.

(Comprehensive Problem: Issuance, Classification, Reporting) The following are four independent situations.

(a) On March 1, 2018, Wilke Co. issued at 103 plus accrued interest \(4,000,000, 9% bonds. The bonds are dated January 1, 2018, and pay interest semiannually on July 1 and January 1. In addition, Wilke Co. incurred \)27,000 of bond issuance costs. Compute the net amount of cash received by Wilke Co. as a result of the issuance of these bonds.

(b) On January 1, 2017, Langley Co. issued 9% bonds with a face value of \(700,000 for \)656,992 to yield 10%. The bonds are dated January 1, 2017, and pay interest annually. What amount is reported for interest expense in 2017 related to these bonds, assuming that Langley used the effective-interest method for amortizing bond premium and discount?

(c) Tweedie Building Co. has a number of long-term bonds outstanding at December 31, 2017. These long-term bonds have the following sinking fund requirements and maturities for the next 6 years.

Sinking Fund

Maturities

2018

\(300,000

\)100,000

2019

100,000

250,000

2020

100,000

100,000

2021

200,000

-

2022

200,000

150,000

2023

200,000

100,000

Indicate how this information should be reported in the financial statements at December 31, 2017.

(d) In the long-term debt structure of Beckford Inc., the following three bonds were reported: mortgage bonds payable \(10,000,000; collateral trust bonds \)5,000,000; bonds maturing in installments, secured by plant equipment $4,000,000. Determine the total amount, if any, of debenture bonds outstanding

On June 30, 2009, County Company issued 12% bonds with a par value of \(800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company鈥檚 credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of \)1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

  1. Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
  2. Prepare the entry required on December 31, 2018, to record the payment of the first 6 months鈥� interest and the amortization of premium on the bonds.
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