Long-term Liabilities: Prepare journal entries for the following transactions of

Question

Long-term Liabilities: Prepare journal entries for the following transactions of Re-Do-It Corp.

3/1/15       Bonds payable with a face value of $900,000, which are dated 1/1/15, are issued at 93 plus accrued in­terest. They bear interest at 9% (payable semiannually at July 1 and January 1). They mature on 1/1/21.

7/1/15       Interest on the above bonds is paid, and amortization of discount is recorded. Straightline amortization is used.

12/1/15     Bonds of a face value of $180,000 (which were issued above on 3/1/15) are purchased at 95 plus accrued interest, and retired. Make all entries necessary to record the retirement. Update amortization on the retired bonds only at this time.

12/31/15   Interest on the remaining bonds is accrued, and amortization of discount is recorded.

Explanation / Answer

Face value of bond 100 Total value 900000 Number of bonds 9000 Interest @ 9% 81000 Interest for 2 months 13500 Value at which issued 93 value of issue 837000 Total value of issue 850500 Discount 49500 Bonds maturing on 1/1/21 70 months Interest payable = 81000 for 5.5 years + 81000 pa for 4 months ( ie from 1/3 / 15 to 1/7/15)                                   = 445500 + 27000                                   = 472500 Hence total interest payable = 472500 for 70 months Discount value = 49500 Total value to be amortized = Interest value + Discount value           = 472500 + 49500           = 522000 7457.143 Value per month to be amortized = 522000/70 = 7457.14 03-01-15 Cash Dr 850500 Discount on bonds Dr 49500            Bonds payable Cr 900000 ( To record issuance of bonds at a discount) 07-01-15 Interest Expense Dr 29828.56           Cash Cr 27000            Discount on bonds Cr 2828.56 ( to record payment of interest and amortization of discount) ( interest = 7457.14*3 incl discount - intersest = 900000* 9%/12*4) 12-01-15 Bonds payable Dr 180000              Cash Cr 171000               Premium on bonds 9000 ( To record retiring of bonds) Interest Expense Dr 7457.14           Cash Cr 6750            Discount on bonds Cr 707.14 ( To record interest expense and amortization) working : Interest paid in cash = 180000*9%/12*5 = 6750 Discount on bonds amortization = (49500/900000*180000)/70*5             = 707.14 12-31-2015 Interest Expense Dr 35794.29           Cash Cr 32400            Discount on bonds Cr 3394.29 ( Interes on 720000 bond s accrued and paid)

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