[The following information applies to the questions displayed below.] On January

Question

[The following information applies to the questions displayed below.]

On January 1, 2016, Shay issues $390,000 of 8%, 20-year bonds at a price of 97.00. Six years later, on January 1, 2022, Shay 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, 2021, 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, 2016?
2. What is the amount of the discount on the bonds at January 1, 2016?

3. How much amortization of the discount is recorded on the bonds for the entire period from January 1, 2016, through December 31, 2021?

4. What is the carrying (book) value of the bonds and the carrying value of the 20% soon-to-be-retired bonds as of the close of business on December 31, 2021?

5. How much did the company pay on January 1, 2022, to purchase the bonds that it retired?

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, 2022.

Explanation / Answer

1) company receive when it issues the bonds on January 1, 2016 = 390000*97/100 = 378300

2)amount of the discount on the bonds at January 1, 2016 = Face value - issue price

                      = 390000-378300

                      = $ 11700

3)annual amortisation :discount /years to maturity

        =11700 /20

        =585

year expired :1 jan 2016 -31 dec2021 =6

Total amortisation : 585 *6 = 3510

4)Carrying value of bond = Issue price + total amortisation

                = 378300+3510

                = 381810

carrying value of bond 20 % retired : 381810 *.20 =$ 76362

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