On June 30, 2009, Nash Company issued 12% bonds with a par value of $760,000 due in 20 years. They were issued at 99 and were callable at 103 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company's credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds.
New 8% bonds were sold in the amount of $970,000 at 102; they mature in 20 years. Nash Company uses straight-line amortization. Interest payment dates are December 31 and June 30.
(a) Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
(b) Prepare the entry required on December 31, 2018, to record the payment of the first 6 months' interest and the amortization of premium on the bonds.
Bonds are long-term debt instruments issued by companies in exchange for capital. Bonds are characterized by their principal (maturity) values to be repaid on their due date as well as by their interest rates which determine the amount to be paid upon the principal of the bond. A bond's issuance price depends on its interest rate in comparison to the market rate.
Answer and Explanation:
We will include four entries:
- The payment of interest and amortization of the discount on the old bond. This entry is included since we are not told as to whether interest and amortization was recorded before the redemption.
- The redemption of the old bond
- The issuance of the new bond
- The payment of interest and amortization of the premium on the new bond.
|June 30, 2018||Interest Expense||$45,790||Record interest expense|
|Cash||$45,600||Record outflow of cash in payment of interest|
|Discount on Bonds Payable||$190||Amortize bond for final six month period ($760,000 x 0.01 = $7,600 discount / 40 periods = $190 per period)|
|June 30, 2018||Bonds Payable||$760,000||Remove bonds payable at face value|
|Loss on Bond Redemption||$26,980||Record loss on redemption ($782,800 + $4,180 - $760,000)|
|Discount on Bonds Payable||$4,180||Remove remaining discount on bonds ($7,600 discount - (190 per period x 18 periods passed))|
|Cash||$782,800||Record outflow of cash made to redeem bonds ($760,000 x 1.03)|
|June 30, 2018||Cash||$989,400||Record inflow of cash from issuance ($970,000 x 1.02)|
|Bonds Payable||$970,000||Record bonds payable at face value|
|Premium on Bonds Payable||$19,400||Record amount received in excess of face value ($989,400 - $970,000)|
|December 31, 2018||Interest Expense||$38,315||Record interest expense for six month period ($38,800 - $485)|
|Premium on Bonds Payable||$485||Record amortization of premium ($19,400 premium / 40 periods = $485 per period)|
|Cash||$38,800||Record outflow of cash made in payment of interest ($970,000 x 8% / 2)|
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from Financial Accounting: Help and ReviewChapter 8 / Lesson 7