Question

On June 30, 2009, County Company issued 12% bonds with a par value of \(800,000 due in 20 years. They were issued at 98 and were callable at 104 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of \)1,000,000 at 102; they mature in 20 years. County Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

Instructions

1. Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
2. 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.

Short answer

1. Loss on redemption is $40,800.
2. Premium on bonds payable is $500.

Step-by-step solution

Meaning of Bonds

Bonds are investment security issued by a company to take money from the investors as a loan. In return, investors get the fixed interest rate (coupon) and the principal amount at maturity.

(a) Preparing journal entry

Date	Particulars	Debit ($)	Credit ($)
June 30, 2017	Bonds payable	800,000
	Loss on Redemption of bonds	40,800
	Discount on bonds payable		8,800
	Cash		832,000
	Cash $\left(\$1,000,000\times 102\%\right)$	1,020,000
	Premium on Bonds Payable		20,000
	Bonds Payable		1,000,000

Working notes:

Calculation of Loss on redemption of bonds

Reacquisition price $\left(\$800,000\times 104\%\right)$	$832,000
Less: Net carrying amounts of bonds redeemed:
Par value $800,000
Unamortized discount$\left(0.02\times \$800,000\times \frac{11}{20}\right)$ 8,800	791,200
Loss on redemption	$40,800

(b) preparing a journal entry

Date	Particulars	Debit ($)	Credit ($)
Dec. 31, 2017	Interest expense	49,500
	Premium on bonds payable $\left(\frac{1}{40}\times \$20,000\right)$	500
	Cash $\left(\$1,000,000\times 10\%\times \frac{6}{12}\right)$		50,000