On April 1, 2017, Novak Company sold 18,900 of its 11%, 15-year, $1,000 face val

Question

On April 1, 2017, Novak Company sold 18,900 of its 11%, 15-year, $1,000 face value bonds at 96. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2018, Novak took advantage of favorable prices of its stock to extinguish 5,700 of the bonds by issuing 188,100 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $32 per share on March 1, 2018. Prepare the journal entries needed on the books of Novak Company to record the following. (Round intermediate calculations to 6 decimal places, e.g. 1.251247 and final answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) (a) April 1, 2017: issuance of the bonds. (b) October 1, 2017: payment of semiannual interest. (c) December 31, 2017: accrual of interest expense. (d) March 1, 2018: extinguishment of 5,700 bonds. (No reversing entries made.)

Explanation / Answer

(a) April 1, 2017: issuance of the bonds Debit Credit Cash A/c $1,814,400 Discount on Bonds Payable $17,085,600 Bonds Payable $18,900,000 (b) October 1, 2017: payment of semiannual interest Debit Credit Interest Expense $1,893,780 Cash $1,039,500 Discount on Bonds Payable $854,280 Cash payment = $18900000 * 11% * 6/12 $1,039,500 Discount on bonds = $17,085,600 / 20 $854,280 © December 31, 2017: accrual of interest expense Debit Credit Interest Expense $519,750 ($18,900,000 * 11% * 3/12) To Interest Payable $519,750

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