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On January 1, 2014 Housen Company issued 10-year bonds of $500,000 at 102. Interest is payable on...

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On January 1, 2014 Housen Company issued 10-year bonds of $500,000 at 102. Interest is payable on January 1 and July 1 at 10%. On April 1, 2015 Housen Company reacquires and retires 50 of its own $1,000 bonds at 98 plus accrued interest. The fiscal period for Housen Company is the calendar year. Prepare entries to record (1) the issuance of the bonds, (2) the interest payments and adjustments relating to the debt in 2014, (3) the reacquisition and retirement of bonds in 2015 and (4) the interest payments and adjustments relating to the debt in 2015. Assume the premium or discount is amortized on a straight-line basis. (Note: Round to the nearest dollar)

Bonds Payable:

Bonds are long-term debt instruments issued by companies in order to raise capital. Bonds are characterized by their face values and their interest rates. The bonds' face values must be repaid by the instruments' maturity dates, and some bonds may even include the option to be retired before maturity.

Answer and Explanation:

(1) The issuance of the bonds

Date Account Debit Credit Explanation
Jan. 1, 2014 Cash $510,000 Record inflow of cash from issuance ($500,000 x 1.02)
Bonds Payable $500,000 Record bonds at face value
Premium on Bonds Payable $10,000 Record the amount received in excess of face value ($510,000 - $500,000)

(2) The interest payments and adjustments relating to the debt in 2014

Date Account Debit Credit Explanation
July 1, 2014 Interest Expense $24,500 Record interest expense for six months ($25,000 - $500)
Premium on Bonds Payable $500 Amortize premiums on straight-line basis ($10,000 / (10 years x 2 periods per year))
Cash $25,000 Record outflow of cash made in payment of interest ($500,000 x (10% per year / 2 periods per year))
Dec. 31, 2014 Interest Expense $24,500 Record interest expense for six months ($25,000 - $500)
Premium on Bonds Payable $500 Amortize premiums on straight-line basis ($10,000 / (10 years x 2 periods per year))
Interest Payable $25,000 Record cash payment to be made for interest ($500,000 x (10% per year / 2 periods per year))

(3) The reacquisition and retirement of bonds in 2015

Date Account Debit Credit Explanation
April 1, 2015 Bonds Payable $50,000 Remove 50 bonds at $1,000 face value per bond ($1,000 x 50)
Interest Expense $1,225 Record interest expense
$24,500 x ($50,000 / $500,000) x (3/6)
Premium on Bonds Payable $25 Remove premium related to 50 bonds.
$500 semiannual amortization x ($50,000 / $500,000) x (3/6)
Gain on Redemption of Bonds $1,000 Record gain on bond redemption (balance the entry)
Cash $50,250 Record outflow of cash made:
$50,000 x 0.98 = $49,000
$50,000 x 10% per year x (3 months / 12 months per year) = $1,250
$49,000 + $1,250 = $50,250

(4) The interest payments and adjustments relating to the debt in 2015

Date Account Debit Credit Explanation
July 1, 2015 Interest Expense $22,001 Record interest expense for six months ($22,500 - $499)
Premium on Bonds Payable $499 Record premium amortization (($10,000 original premium - $1,025 amortized) / 18 periods remaining)
Cash $22,500 Record cash paid for interest for six months (($500,000 - $50,000 retired) x 10% / 2)
Dec. 31, 2015 Interest Expense $22,001 Record interest expense for six months ($22,500 - $499)
Premium on Bonds Payable $499 Record premium amortization
Interest Payable $22,500 Record cash to be paid for interest for six months

Learn more about this topic:

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Long-Term Debt: Definition, Cost & Formula

from Financial Accounting: Help and Review

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