On January 1, 2011, Steadman issues $390,000 of 8%, 20-year bonds at a price of
ID: 2361321 • Letter: O
Question
On January 1, 2011, Steadman issues $390,000 of 8%, 20-year bonds at a price of 97.00. Six years later, on January 1, 2017, Steadman retires 20% of these bonds by buying them on the open market at 104.50. All interest is accounted for and paid through December 31, 2016, the day before the purchase. The straight-line method is used to amortize any bond discount. 1. How much does the company receive when it issues the bonds on January 1, 2011? Cash proceeds from sale of bonds at issuance $ 2. What is the amount of the discount on the bonds at January 1, 2011? Amount of discount $ 3. How much amortization of the discount is recorded on the bonds for the entire period from January 1, 2011, through December 31, 2016? Amortization of discount $ 4.1 What is the carrying (book) value of the bonds as of the close of business on December 31, 2016? Carrying value $ 4.2 What is the carrying value of the 20% soon-to-be-retired bonds on December 31, 2016? Carrying value $ 5. How much did the company pay on January 1, 2017, to purchase the bonds that it retired? Purchase price $ 6. What is the amount of the recorded gain or loss from retiring the bonds? 7. Prepare the journal entry to record the bond retirement at January 1, 2017.Explanation / Answer
1.How much does the company receive when it issues the bonds on January 1, 2011? 350,000 x 0.9775 = $342,125 2.What is the amount of the discount on the bonds at January 1, 2011? 350,000 - 342,125 = $7,875 3.How much amortization of the discount is recorded on the bonds for the entire period from January 1, 2011, through December 31, 2016? 7,875 / 15 = $525 per year 525 x 6 years = $3,150 4.(a)What is the carrying (book) value of the bonds as of the close of business on December 31, 2016? 7,875 - 3,150 amortized discount = $4,725 unamortized discount 350,000 face value - 4,725 unamortized discount = $345,275 carrying value (b)What is the carrying value of the 20% soon-to-be-retired bonds on December 31, 2016? 345,275 x 20% = $69,055 5.How much did the company pay on January 1, 2017, to purchase the bonds that it retired? 350,000 face value x 20% x 1.045 = $73,150 *Note: In case it might come up, there would have been a loss of 73,150 - 69,055 = $4,095 on the purchase of the bonds, and the entry would have been: Dr Bonds Payable 70,000 (350,000 x 20%) Dr Loss on Bonds Redeemed 4,095 Cr Discount on Bonds Payable 945 (20% x 4,725 unamortized amount) Cr Cash 73,150
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