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.

1. How much does the company receive when it issues the bonds on January 1, 2017?

2. What is the amount of the discount on the bonds at January 1, 2017?

3. How much amortization of the discount is recorded on the bonds for the entire period from January 1, 2017, through December 31, 2022?

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, 2022?

5. How much did the company pay on January 1, 2023, 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, 2023.

Explanation / Answer

1. face value of bond= 100,

face value bonds issued= 700000

Number of bonds issued= 700000/100= 7000

issue price= 97.75

Proceeds from issue= 7000* 97.75= 684250

2. Discount on bonds issued= face value- proceeds= 700000- 684250= 15750

3. Life of bonds= 15 year

Amortisation per year = 15750/15= 1050 per year

number of years complete from Jan 2017 to Dec 2022= 6 years

Amortisation recorded= 1050*6= 6300

4. carrying value of bonds= proceeds from issue+ discount amortised= 684250+6300= 690550

Carrying value of 20% soon to be retired bonds= 690550*20%= 138110

5. Number of bonds purchased= 7000*20%= 1400

Amount paid to purchase= 1400* 104.5= 146300

6. (Gain) or loss from retirement of bonds= amount paid - carrying value= 146300-138110= 8190

7. Journal:

Account Debit Credit Bonds payable 140000 Discount on bonds payable 1890 Cash 146300 Loss on extinguishment of debt 8190

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