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Chapter 14: Q.14-15E (page 757)

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)

Short Answer

Expert verified

Answer:

Loss on redemption is$22,000.

Step by step solution

01

Meaning of Redemption of Bonds

When afixed income investment matures, and you get your investment amount back, the repayment is known as redemption. In other words,Redemption of bonds means repayment of a debt security or preferred stock issue at or before maturity, at par, or a premium price.

02

Computation of the gain or loss

Given,

Face value = $300,000

Unamortized discount = $10,000

Particulars
Amount ($)

Reacquisition price ($300,000 脳 104%)

$312,000

Less: Net carrying amount of bonds redeemed

Par value

$300,000

Unamortized discount

($10,000)

$290,000

Loss on Redemption

$22,000

03

Recording of refunding transactions

Transactions

Accounts Titles and Explanations

Debit

Credit

1

Bonds payable

$300,000

Loss on Redemption

$22,000

Discount on bonds payable

$10,000

Cash

$312,000

2

Cash

$309,000

Premium on bonds payable

$9000

Bonds payable

$300,000

Explanations:

1)Bonds payable = $300,000 (Given)

Loss on Redemption = $22,000 (Computed above)

Discount on bonds payable = $10,000 (Given)

Cash = ($300,000 脳 104%) = $312,000

2) Cash = ($300,000 脳 103%) = $309,000

Premium on bonds payable = ($309,000 -$300,000 = $9000

Bonds payable = $300,000 (Given)

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Most popular questions from this chapter

Question: Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.

Question: What is the 鈥渃all鈥� feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?

On January 1, 2017, Nichols Company issued for \(1,085,800 its 20-year, 11% bonds that have a maturity value of \)1,000,000 and pay interest semiannually on January 1 and July 1. The following are three presentations of the long-term liability section of the balance sheet that might be used for these bonds at the issue date.

1

Bonds payable (maturing January 1, 2037)

\(1,000,000

Unamortized premium on bonds payable

85,800

Total bond liability

\)1,085,800

2

Bonds payable鈥攑rincipal (face value \(1,000,000 maturing January 1, 2037)

\) 142,050a

Bonds payable鈥攊nterest (semiannual payment \(55,000)

943,750b

Total bond liability

\)1,085,800

3

Bonds payable鈥攑rincipal (maturing January 1, 2037)

\(1,000,000

Bonds payable鈥攊nterest (\)55,000 per period for 40 periods)

2,200,000

Total bond liability

\(3,200,000

aThe present value of \)1,000,000 due at the end of 40 (6-month) periods at the yield rate of 5% per period

bThe present value of \(55,000 per period for 40 (6-month) periods at the yield rate of 5% per period.

Instructions

(a) Discuss the conceptual merit(s) of each of the date-of-issue balance sheet presentations shown above for these bonds.

(b) Explain why investors would pay \)1,085,800 for bonds that have a maturity value of only $1,000,000.

(c)Assuming that a discount rate is needed to compute the carrying value of the obligations arising from a bond issue at any date during the life of the bonds, discuss the conceptual merit(s) of using for this purpose: (1) The coupon or nominal rate. (2) The effective or yield rate at date of issue.

(d)If the obligations arising from these bonds are to be carried at their present value computed by means of the current market rate of interest, how would the bond valuation at dates subsequent to the date of the issue be affected by an increase or a decrease in the market rate of interest?

Assume the bonds in BE14-6 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company鈥檚 journal entries for (a) the January 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?
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