On January 1, 2017, Shay issues $700,000 of 10%, 15-year bonds at a price of 97¾

Question

On January 1, 2017, Shay issues $700,000 of 10%, 15-year bonds at a price of 97¾. Six years later, on January 1, 2023, Shay retires 20% of these bonds by buying them on the open market at 104½. All interest is accounted for and paid through December 31, 2022, the day before the purchase. The straight-line method is used to amortize any bond discount.

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, 2022?

How much did the company pay on January 1, 2023, to purchase the bonds that it retired?

What is the amount of the recorded gain or loss from retiring the bonds?

Prepare the journal entry to record the bond retirement at January 1, 2023.

Explanation / Answer

Solution:

Primary Working:

Face Value of the bonds = $700,000

Issue Price of the bonds = Face Value $700,000 x 97.75% = $684,250

Issue Price is less than the face value, it means bonds are issued at discount.

Discount on Bonds Payable = 700,000 – 684,250 = $15,750

Discount on bonds payable is amortized over the life of bonds.

Annual Amortization of Discount on Bonds Payable = Total Discount / Maturity Period

= 15,750 / 15

= $1,050

Total Amortization of Discount on bonds payable in 6 years = $1,050 x 6 = $6,300

Part 1 ---- 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, 2022

Carrying Boon Value of the bonds on Dec 31, 2022 = Face Value – Unamortized Bonds Discount

= $700,000 – (Total Discount $15,750 – Amortized Discount for 6 years $6,300)

= $700,000 – 9,450

= $690,550

Carrying / Book Value of the bonds of the 20% soon-to-be-retired bonds as of the close of business on December 31, 2022 = Carrying Value of total bonds x 20%

= $690,550 * 20%

=$138,110

Part 2 -- How much did the company pay on January 1, 2023, to purchase the bonds that it retired

Face Value of Bonds Retired = $700,000 x 20% = $140,000

Retired at 104.5%

Retirement Amount = Face Value x 104.5% = 140,000 x 104.5% = $146,300

The company pay on January 1, 2023 to purchase the bonds that it retired = $146,300

Part 3 --- What is the amount of the recorded gain or loss from retiring the bonds ?

Carrying Value of Retired Bonds as calculated in part 1 = $138,110

Amount to be paid to retire the bonds as per part 2 = $146,300

The company will pay higher amount than carrying value to retire the bonds, hence the loss from retiring the bonds is recorded.

Loss from retiring the bonds = 146,300 – 138,110 = $8,190

Part 4 --- Prepare the journal entry to record the bond retirement at January 1, 2023

Date

General Journal

Debit

Credit

Jan.1, 2023

Bonds Payable (20% Face Value)

$140,000

Loss on Retirement of Bonds (Bal figure)

$8,190

Discount on Bonds Payable

(Total Unamortized Discount from part 2 is $9,450*20% Retiring bonds)

$1,890

Cash

$146,300

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Date

General Journal

Debit

Credit

Jan.1, 2023

Bonds Payable (20% Face Value)

$140,000

Loss on Retirement of Bonds (Bal figure)

$8,190

Discount on Bonds Payable

(Total Unamortized Discount from part 2 is $9,450*20% Retiring bonds)

$1,890

Cash

$146,300

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