Question

(Issuance of Bonds between Interest Dates, Straight-Line, Redemption) Presented below are selected transactions on the books of Simonson Corporation.

May 1, 2017 Bonds payable with a par value of \(900,000, which are dated January 1, 2017, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12% (payable annually at January 1), and mature January 1, 2027. (Use interest expense account for accrued interest.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the amortization of the proper amount of premium. (Use straight-line amortization.)

Jan. 1, 2018 Interest on the bonds is paid.

April 1 Bonds with par value of \)360,000 are called at 102 plus accrued interest, and redeemed. (Bond premium is to be amortized only at the end of each year.)

Dec. 31 Adjusting entries are made to record the accrued interest on the bonds, and the proper amount of premium amortized.

Instructions

(Round to two decimal places.)

Prepare journal entries for the transactions above.

Short answer

The business entity will generate a gain of$12,352on the redemption of bonds.

Step-by-step solution

Definition of Bond Amortization

A method used by the business entity to spread the discount or the premium on the bonds payable over its life is known as bond amortization.

Journal entries

Date	Accounts and Explanation	Debit ($)	Credit ($)
1 May 2017	Cash	$990,000
	Bond payable		$900,000
	Premium on bond payable		$54,000
	Interest expenses $\left(\$900,000\times 12\%\times \frac{4}{12}\right)$		$36,000
31 Dec 2017	Interest expenses $\left(\$900,000\times 12\%\right)$	$108,000
	Interest payable		$108,000
31 Dec 2017	Premium on bond payable	$3,724.14
	Interest expenses $\left[\frac{8}{\left(12months\times 10Year\right)-4months}\times \$54,000\right]$		$3,724.14
1 Jan 2018	Interest payable	$108,000
	Cash		$108,000
1 April 2018	Bond payable	$360,000
	Premium on bond payable	$19,552
	Interest expenses	$10,800
	Cash		$378,000
	Gain on redemption		$12,352
31 Dec 2018	Interest expenses$\left[\$108,000\times 60\%\right]$	$64,800
	Interest payable		$64,800
31 Dec 2018	Premium on bond payable	$3,911
	Interest expenses		$3,911

Working note:

Calculation of Gain on redemption of bonds on 1 April 2018:

Particular	Amount $
Reacquisition$\left(\$360,000\times 102\%\right)\mathbf{+}\left(\$360,000\times 12\%\times \frac{3}{12}\right)$	$378,000
Less: net carrying value	(360,000)
Less: Unamortized premium role="math" localid="1659193217694" $[\frac{116-11}{\left(12\mathrm{months}\times 10\mathrm{Year}\right)-4\mathrm{months}}\times \$54,000\times \frac{\$360,000}{\$900,000}]$	(19,552)
Less: Accrued interest$\left[\$108,000\times \frac{3}{12}\times \frac{\$360,000}{\$900,000}\right]$	(10,800)
Gain on redemption	$12,352

Calculation of premium amount in adjusting entry made on 31 Dec 2018:

Particular	Amount $
Amortization per year$\left[\frac{12}{116}\times \$54,000\times 60\%\right]$	$3,352
Amortization on bond redeemed for 3 months $\left[\frac{3}{116}\times \$54,000\times 40\%\right]$	$559
Premium amortized	$3,911