e. Assume that on January 1, 2017 the entire bond was called back at 108 and ext

Question

e. Assume that on January 1, 2017 the entire bond was called back at 108 and extinguished. Prepare the debt extinguishment entry.

Dresden Company issued a 6% per year semi-annual interest bond to yield 5% per year. The bond is a 10 year bond with a face value of $1,000,000 and pays interest every January 1 and July 1. In addition, bond issue costs were $45,000. The bond is callable after one year at 108. Dresden uses the effective interest method of amortization. The bond was issued January 1, 2015. Determine the proceeds from the bond issue. Record the issue of the bond and the bond issue costs. Prepare an amortization table through January 1, 2017. Record the necessary accrual entries on December 31, 2016, their year end.

Explanation / Answer

Solution:

Face Value of Bonds = $1,000,000

Semi Annual Coupon Interest Payable to bond holders = $1,000,000 x 6% x ½ = $30,000

Number of Interest Payment during the life of bond = 10 x 2 = 20

Yield on Bonds = 5% Annually or 2.5% semi annually

Issue Price of Bonds = Coupon Interest x PVIFA (2.5%, 20) + Par Value x (2.5%, 20)

= ($30,000 x 15.589) + ($1,000,000 x 0.610)

= $467,670 + $610,000

= $1,077,670

Since Issue Price is higher than Par Value of bonds, the bonds are issued at premium.

Premium on Bonds Payable = $1,077,670 - $1,000,000 = $77,670

a) the proceeds from the bond issue

Net Proceeds from the bond issue = Issue Price of the Bonds – Bond Issue Costs = $1,077,670 - $45,000 =$1,032,670

Note --- Present Value interest factor is taken 3 decimal places, if more decimal places are considered there will be slightly change in the value of bonds issued.

b) Record the issue of the bond and bond issue costs

Date

Account Titles and Explanation

Debit

Credit

Jan 1, 2015

Cash A/c      Dr.

$1,032,670

Bond Issue Cost Dr.

$45,000

   To Bonds Payable

$1,000,000

   To Premium on Bonds Payable

$77,670

(Bonds issued at premium )

c) Bond amortization table

Annual Interest Periods

Interest to be paid (1000,000 * 6% * 1/2)

Interest Expenses to be recorded (Carrying Value at the beginning of year x 5% x 1/2)

Premium Amortization (Interest to be paid - Interest Expenses)

Unamortized Premium

Bond Carrying Value

1-Jan-15

0

0

$77,670

$1,077,670

1-Jul-15

$30,000

$26,942

$3,058

$74,612

$1,074,612

1-Jan-16

$30,000

$26,865

$3,135

$71,477

$1,071,477

1-Jul-16

$30,000

$26,787

$3,213

$68,264

$1,068,264

1-Jan-17

$30,000

$26,707

$3,293

$64,971

$1,064,971

1-Jul-17

$30,000

$26,624

$3,376

$61,595

$1,061,595

1-Jan-18

$30,000

$26,540

$3,460

$58,135

$1,058,135

1-Jul-18

$30,000

$26,453

$3,547

$54,588

$1,054,588

1-Jan-19

$30,000

$26,365

$3,635

$50,953

$1,050,953

1-Jul-19

$30,000

$26,274

$3,726

$47,227

$1,047,227

1-Jan-20

$30,000

$26,181

$3,819

$43,408

$1,043,408

1-Jul-20

$30,000

$26,085

$3,915

$39,493

$1,039,493

1-Jan-21

$30,000

$25,987

$4,013

$35,480

$1,035,480

1-Jul-21

$30,000

$25,887

$4,113

$31,367

$1,031,367

1-Jan-22

$30,000

$25,784

$4,216

$27,151

$1,027,151

1-Jul-22

$30,000

$25,679

$4,321

$22,830

$1,022,830

1-Jan-23

$30,000

$25,571

$4,429

$18,401

$1,018,401

1-Jul-23

$30,000

$25,460

$4,540

$13,861

$1,013,861

1-Jan-24

$30,000

$25,347

$4,653

$9,208

$1,009,208

1-Jul-24

$30,000

$25,230

$4,770

$4,438

$1,004,438

1-Jan-25

$30,000

$25,111

$4,438

$0

$1,000,000

d) Journal entry on Dec 31, 2016

On Dec 31, 2016, company will record the Interest Expenses and Premium amortization.

Date

Account titles

Debit

Credit

Dec'31, 2016

Interest Expenses

$26,707

Premium on Bonds Payable

$3,293

     Interest Payable

$30,000

e)

Date

Account titles

Debit

Credit

Jan'1, 2017

Bonds Payable

$1,000,000

Premium on Bonds Payable (Unamortized Portion)

$64,971

Loss of Extinguishment/Retirement of Bond

$15,029

      Cash (1,000,000*108%)

$1,080,000

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Date

Account Titles and Explanation

Debit

Credit

Jan 1, 2015

Cash A/c      Dr.

$1,032,670

Bond Issue Cost Dr.

$45,000

   To Bonds Payable

$1,000,000

   To Premium on Bonds Payable

$77,670

(Bonds issued at premium )

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