The following information is taken from Grouper Corp.’s balance sheet at Decembe
ID: 2414007 • Letter: T
Question
The following information is taken from Grouper Corp.’s balance sheet at December 31, 2016.
Interest is payable annually on January 1. The bonds are callable on any annual interest date. Grouper uses straight-line amortization for any bond premium or discount. From December 31, 2016, the bonds will be outstanding for an additional 10 years (120 months).
Prepare the adjusting entry at December 31, 2018, to amortize bond discount and to accrue interest on the remaining bonds.
Current liabilities Interest payable $ 89,000 Long-term liabilities Bonds payable (7%, due January 1, 2027) $3,360,000 Less: Discount on bonds payable 33,600 3,326,400Explanation / Answer
(a) Journal entry for payment of interest
Interest Payable Dr 89000
To Cash 89000 (Cr)
Note- It is assumed that bond is issued during the year 2016. Hence, whatever interest accrued as aon balance sheet date is paid on 1st Jan, 2017.
(b) Journal entry as on Dec 31, 2017
Interest Expense (3360000*7%) Dr 235200
To Interest Payable 235200 (Cr)
(Being interest accrued for the year 2017)
Profit and Loss Dr 238560
To Discount on Bonds (33600*12/120) 3360 (Cr)
To Interest Expense 235200 (Cr)
(Being discount on bonds written off and interest expense transferred to profit and loss)
(c) Redemption on bonds
7% Bond Dr 560000
Premium on redemption (560000*2/100) Dr 11200
To Bond holder 571200
Bond Holder Dr 571200
To Cash 571200
Profit and Loss Dr 11200
To Premium on redemption 11200
(d) Journal entry as on Dec 31, 2018
Interest Expense (3360000-560000)*7% Dr 196000
To Interest Payable 196000
Profit and Loss Dr 203840
To Interest Expense 196000
To Discount on bonds (refer Note below) 7840
Note-
Face Value of Bond redeemed- 560000
Discount on bond balance as on Dec 31, 2017- 33600-3360= 30240
% of Bond redeemed- 560000/3360000= 1/6th
Discount on bond to be written off immediately on redemption- 30240*1/6= 5040
Balance Discount to be left after redemption- 30240-5040= 25200
Discount written off on balance bond= 25200*12/108= 2800
Hence, Total Discount on bonds written off during the year 2018= 5040+2800= 7840
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