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The long-term liability section of Twin Digital Corporation’s balance sheet as of December 31, 2017, included...

The long-term liability section of Twin Digital Corporation’s balance sheet as of December 31, 2017, included 12% bonds having a face amount of $40 million and a remaining discount of $1 million. Disclosure notes indicate the bonds were issued to yield 14%. Interest expense is recorded at the effective interest rate and paid on January 1 and July 1 of each year. On July 1, 2018, Twin Digital retired the bonds at 103 ($41.2 million) before their scheduled maturity.

Required: 1. & 2. Prepare the necessary journal entries for Twin Digital on July 1, 2018.

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Expert Solution

Face value of Bond = $40 million

Coupon rate = 12%

Discount on Bonds Payable = $1 million

Carrying Value of Bonds = $40 million - $1 million = $39 million

Yield on Bonds = 14%

Semi annual Coupon amount on Bonds = $40 million*12%*1/2 = $2.4 million

Interest expense as on 1 January, 2018 = Carrying value of Bonds*Interest rate

= $39 million*14%*1/2 = $2.73 million

Discount amortised = $2.73 - $2.4 = $0.33 million

Balance of Discount on Bond Payable = $1 million - $0.33 = $0.67million

Carrying Value of Bonds = $40 million - $0.67 million = $39.33 million

Journal entry as on January 1,2018 for recording interest expense:

Date

Accounts Title and explanation

Debit($)

Credit($)

Jan 1, 2018

Interest Expense

2.73 million

Cash

2.4 million

Discounts on Bond Payable

0.33 million

As on July 2018:

Bond Payable = $40 million

Interest expense = $39.33 million*14%*1/2 = $2.7531 million

Cash interest to be paid = $2.4 million

Discounts on Bonds Payable = $2.7531 million - $2.4 million = $0.3531 million

Balance of Discount on Bonds payable = $0.67 million - $0.3531 million = $0.3169 million

Carrying Value of Bonds = $40 million - $0.3169 million = $39.6831 million

Cash paid on retirement of Bonds = $41.2 million

Loss on retirement on Bonds = $41.2 million - $39.6831 million = $1.5169 million

Journal entry for retirement of Bonds as on July 1,2018:

Date

Accounts Title and explanation

Debit($)

Credit($)

July 1, 2018

Bonds Payable

40 million

Loss on retirement on Bonds

1.5169 million

Cash

41.2 million

Discounts on Bond Payable

0.3169 million

ekkarill92 answered 2 years ago
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