Question

On April 1, 2018, Seminole Company sold 15,000 of its 11% 15-year, $1,000 face value bonds at 97.  Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization.  On March 1, 2019, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its $10 par value common stock.  At this time, the accrued interest was paid in cash.  The company’s stock was selling for $31 per share on March 1, 2019.

Instructions:

Prepare the journal entries needed on the books of Seminole Company to record the following.

A) April 1, 2018: issuance of the bonds.

B) October 1, 2018: payment of semiannual interest.

C) December 31, 2018: accrual of interest expense.

D) March 1, 2019: extinguishment of 6,000 bonds. (No reversing entries made.) Entry 1) To Record Payment of interest due on redemption of bonds. Entry 2) To Record issue of common stock for redemption of bonds. *Please explain D ONLY* I do not understand how to detemind specifically D entry 1* The answer says what is below, but I do not conceptually understand how they got the numbers and the coneptual aspect of the calculation. Dr. Interest Payable 165,000 Dr. Interest Expense 112,00 Cr. Cash 275,000 Cr. Discount on Bonds Payable 2,000

Answer 1

That answer is not correct. All figures in the answer are incorrect.

Entry D-1, will be prepared in the following manner:

Face value of bonds = 15,000 x $1,000 = $15,000,000

Issue price of the bonds = $15,000,000 x 97% = $14,550,000

Total discount on bonds payable = $15,000,000 - $14,550,000 = $450,000

Number of semiannual periods over the life of the bonds = 15 x 2 = 30

Discount amortized for each semiannual period = $450,000 / 30 = $15,000

Now prepare the entry as follows:

Account Titles	Debit	Credit
Interest Payable (15,000,000 x 11% x 3/12)	412,500
Interest Expense (15,000,000 x 11% x 2/12) + (15,000 x 2/6)	280,000
Discount on Bonds payable (15,000 x 2/6)		5,000
Cash (412,500 + 280,000 - 5,000)		687,500

Interest payable is the interest accrued on December 31, 2018, for the 3 months that is October, November, and December.

Interest expense is the interest for 2 months that is January, 2019 and February, 2019. Also, when bonds are issued at a discount, interest expense to be recorded for a period is equal to the sum of cash interest paid plus discount amortized.

Discount amortized for 2 months that is January, 2019 and February, 2019.