Question

On January​ 1, 2017​, Crawford Corporation issued five​-year, 4​% bonds payable with a face value of

$2,600,000. The bonds were issued at 88 and pay interest on January 1 and July 1. Crawford amortizes bond discounts using the​ straight-line method. On December​ 31, 2019​, Crawford retired the bonds early by purchasing them at a market price of 94. The​ company's fiscal year ends on December 31.

1. Journalize the issuance of the bonds on January​ 1, 2017.

2. Record the semiannual interest payment and amortization of bond discount on July​ 1, 2017.

3. Record the interest accrual and discount amortization on December​ 31, 2017.

4. Calculate the carrying value of the bonds payable on December​ 31, 2019​, prior to their retirement.

5. Calculate the gain or loss on the retirement of the bonds payable on December​ 31, 2019. Indicate where this gain or loss will appear in the financial statements.

Answer 1

Q-1

Date	Particulars	Debit	Credit
01-01-2017	Bank or Cash Account                                 Dr	$ 2288000
	Discount on Bond issue                              Dr	$ 312000
	To Bonds payable                            Cr		$ 2600000
	(Being bond issued at face value $ 2600000)

Q 2

01-07-2017	Bond Interest Account( 52000+31200)     Dr	$ 83200
	To Interest payable                          Cr		$ 83200
	[$2600000x 4%]/2 =52000
	(Being bond interest due for first half year)
01-07-2017	Interest Payable account                           Dr	$83200
	To Bank                                             Cr		$ 52000
	To Discount on bond issue           Cr		$31200
	(Being bond interest paid and discount expense amortised)

Q-3

31-12-2017	Bond Interest Account( 52000+31200)     Dr	$ 83200
	To Interest payable                          Cr		$ 83200
	[$2600000x 4%]/2 =52000
	(Being bond interest due for second half year)

Q-4

Calculation of carrying value of the bond payable on December 31 2019
Carrying value of the bond payable is calculated by reducing outstanding balance in 'Discount on bonds payable' account from the face value of the bond
Face value of the bond	$ 2600000
Total discount on bond issue	$ 312000
Amortisation years	5 years
Number of years Amortised(2017-2019)	3 years
Amortisation per year (312000/5)	$62400
Total amortised amount for the entire 3 years (62400 x 3)	$ 187200
Outstanding balance in Discount on issue of debentures	$ 124800
(312000-187200)
Therefore carryinyg value of bond is ($ 2600000- 124800)	2475200

Q-5

Calculation of Gain or Loss on retirement of bond
Carrying value of bond	2475200
Retirement of bond (26000*94)	2444000
Gain on retirement since the repayment amount is less than the carrying value)	31200

Gain on retirement of bonds will be appeared in Income statement as gain on reitement of bond

Working Notes
1	The discount on issue of bonds is treated as an additional interest expense over the life of the bond
2	It is assumed that face value per bond to be $ 100
3	Therefore number of bonds issued is (2600000/100) = 26000