The following information is taken from Pina Corp.\'s balance sheet at December
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Question
The following information is taken from Pina Corp.'s balance sheet at December 31, 2016. Interest is payable annually on January 1. The bonds are callable on any annual interest date. Pina 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). Journalize the payment of bond interest on January 1, 2017. Prepare the entry to amortize bond discount and to accrue the interest on December 31, 2017. Assume on January 1, 2018, after paying interest, that Pina Corp. calls bonds having a face value of $660,000. The call price is 102. Record the redemption of the bonds. Prepare the adjusting entry at December 31, 2018, to amortize bond discount and to accrue interest on the remaining bonds.Explanation / Answer
Answer 1:
Journal Entry for payment of Bond Interest on January 1,2017 (Assuming that the corporation had created the liability for part Interest payable on the bond in "Interest Payable account" to the extent of $91,500. And for the rest we will create the liability on 1 jan 2017 amounting to $ 106500. therefore total Interest payable liability is $ 3960000*5% = $198000)
Interest Expense A/c ------------ Dr $106,500 ( 198000 - 91500)
To Interest Payable A/c $106,500 ( 198000 - 91500)
(Being The liability on Interest payment on the bond is tranfered to Interest payable A/c)
Interest Payable A/c ------ Dr $198,000 ( 3960000*5%)
To Bank A/c $ 198,000 ( 3960000*5%)
(Being Interest on the Bond is paid)
Answer B : The corporation is following the straight line amortisation for bond discount , therefore , the amortisation figure will be Discount on the bond Issue / no. of outstanding year = 39600 / 10 = 3960 per year.
Journal Entry for amortisation of bond discount and Accrue Interest on 31st Dec 2017
Interest Expenses A/c ------------ Dr. $ 201,960 (3960 +198000)
To Discount on Bond Issue A/c $ 3,960 (39600/10)
To Interest Payable A/c $ 198,000 ( 3960000*5%)
(Being the amortisation of Bond Issue and Interest accrue on the bond tranfer to the Interest Expenses a/c )
Answer C:
Journal Entry for Redemption of the bonds
5%, Bonds A/c -------- Dr. $660,000 (6600*100)
Premium on Redemption A/c ---- Dr $13,200 (6600*2)
To Bank A/c $673,200 (6600*102)
(Being 6600 bond are redeem at price of $102.00 ,i.e. premium of $ 2 )
Profit & loss A/c ------- Dr $ 13,200
To Premium on Redemption A/c $ 13,200
(Being Premium on Redemption of Bond tranfer to Profit and loss a/c)
Answer D:
The position as on 31st dec 2018 is , there is only 3300000 bonds payable left due to redemption of 660000 face value of bond , therefore bond payable as on 31st dec 2018 = 3960000 - 660000 = 3300000.
now, as in year 2018, 6600 bonds are redeemed so their discount on Issue should be taken care in year 2018,
Total discount on 6600 bonds Issuance is $6600 out of which discount of bond Issuance of $ 660 had already been tranferred to Interest expense account in 2017 . the calculation is discount on 6600 bond / no. of year = 6600 / 10 = 660. But in 2018, 6600 bonds are redeemed so remaining amortisation for 6600 bond will be done in year of redeemption itself i.e. 2018. the remain amortisation on 6600 bonds are 6600 - 660= $5940 . And the normal amortisation on 33000 bonds will be countinue as earlier.
therefore journal entry as on 31st dec 2018 will be
Interest expenses A/c ------------ Dr. $ 174,240 ($9240+$165000)
To Discount on Bonds Issue A/c $ 9,240 {$5940(remaining amortisation of 6600 bonds) + $3300 (normal amortisation on 33000 Bonds)}
To Interest Payable A/c $ 165,000 ($3300000*5%)
(Being remaining amortisation on redeemed 6600 bonds with normal amortisation on remaining 33000 bonds and Interest accured for the year 2018 are transfer to Interest Expense account)
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