Question

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)

Short answer

Answer:

Loss on redemption is$22,000.

Step-by-step solution

Meaning of Redemption of Bonds

When afixed income investment matures, and you get your investment amount back, the repayment is known as redemption. In other words,Redemption of bonds means repayment of a debt security or preferred stock issue at or before maturity, at par, or a premium price.

Computation of the gain or loss

Given,

Face value = $300,000

Unamortized discount = $10,000

Particulars	Amount ($)
Reacquisition price ($300,000 × 104%)		$312,000
Less: Net carrying amount of bonds redeemed
Par value	$300,000
Unamortized discount	($10,000)	$290,000
Loss on Redemption		$22,000

Recording of refunding transactions

Transactions	Accounts Titles and Explanations	Debit	Credit
1	Bonds payable	$300,000
	Loss on Redemption	$22,000
	Discount on bonds payable		$10,000
	Cash		$312,000
2	Cash	$309,000
	Premium on bonds payable		$9000
	Bonds payable		$300,000

Explanations:

1)Bonds payable = $300,000 (Given)

Loss on Redemption = $22,000 (Computed above)

Discount on bonds payable = $10,000 (Given)

Cash = ($300,000 × 104%) = $312,000

2) Cash = ($300,000 × 103%) = $309,000

Premium on bonds payable = ($309,000 -$300,000 = $9000

Bonds payable = $300,000 (Given)