Question

(Entries for Redemption and Issuance of Bonds) Matt Perry, Inc. had outstanding \(6,000,000 of 11% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued \)9,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 98. A portion of the proceeds was used to call the 11% bonds (with unamortized discount of $120,000) at 102 on August 1.

Instructions

Prepare the journal entries necessary to record issue of the new bonds and refunding of the bonds.

Short answer

Discount on issue of bonds $180,000

Loss on redemption of bonds $240,000

Step-by-step solution

Meaning of Bonds

Bonds are long-term financial debt instruments issued by a company for which the company pays interest to the bondholders and repays the borrowed amount after a specific period. A company can issue bonds at par, premium, or discount.

Journal Entries

Date	Accounts Titles and Explanations	Debit	Credit
July 1	Cash	$8,820,000
	Discount on Bonds Payable	$180,000
	Bonds payable		$9,000,000
	(To record issue of bonds)
Aug 1	Bonds Payable	$6,000,000
	Loss on redemption of bonds	$240,000
	Discount on bonds payable		$120,000
	Cash		$6,120,000
	(To record redemption of bonds)

Working notes:

Bonds payable face value	$9,000,000
Issue price at 98% ($9,000,000 × 98%)	$8,820,000
Discount on issue of bonds	$180,000

Face value of bonds redeemed	$6,000,000
Less: Discount unamortized	$120,000
Net carrying value	$5,880,000
Redemption value ($6,000,000 × 102%)	$6,120,000
Loss on redemption of bonds	$240,000