The long term liability section of Twin Digital Corporation\'s balance sheet as
ID: 2354644 • Letter: T
Question
The long term liability section of Twin Digital Corporation's balance sheet as of December 31, 2010, included 12% bonds having a face amount of $20 million and a remaining discount of $1 million. Disclosure notes indicate the bonds were issued to yield 14% Interest expense is recorded at the effective interest rate and paid on January 1 and July 1 each year. On July 1, 2011, Twin Digital retired the bonds at 102 ($20.4 million) before their scheduled maturity.2. Prepare the journal entry by Twin Digital to record the redemption of the bonds on July 1, 2011.Explanation / Answer
20,000,000 - 1,000,000 = $19,000,000 carrying value of bonds
19,000,000 x 7% = $1,330,000 interest expense
20,000,000 x 6% = $1,200,000 cash payment
1,330,000 - 1,200,000 = $130,000 discount amortization
Prepare the journal entry by Twin Digital to record the redemption of the bonds on July 1, 2011.
If the carrying value is less than the redemption price, there is a loss. If it is more than the redemption price, there is a gain.
19,000,000 + 130,000 = $19,130,000 new carrying value of bonds
20,400,000 - 19,130,000 = $1,270,000 loss on redemption
1,000,000 - 130,000 = $870,000 new remaining discount balance
Dr Bonds Payable 20,000,000
Dr Loss on Bonds Redeemed 1,270,000
Cr Discount on Bonds Payable 870,000
Cr Cash 20,400,000
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