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Exercise 10-11 Straight-Line: Bond computations, amortization, and bond retirement LO P2, P4 On January 1, 2019,...

Exercise 10-11 Straight-Line: Bond computations, amortization, and bond retirement LO P2, P4

On January 1, 2019, Shay Company issues $290,000 of 11%, 20-year bonds. The bonds sell for $282,750. Six years later, on January 1, 2025, Shay retires these bonds by buying them on the open market for $303,050. All interest is accounted for and paid through December 31, 2024, the day before the purchase. The straight-line method is used to amortize any bond discount.

1. What is the amount of the discount on the bonds at issuance?
2. How much amortization of the discount is recorded on the bonds for the entire period from January 1, 2019, through December 31, 2024?
3. What is the carrying (book) value of the bonds as of the close of business on December 31, 2024?
4. Prepare the journal entry to record the bond retirement.

Solutions

Expert Solution

1)Amount of Discount = Issue price - par value

                 = 282750-290000

                = 7250

2)Annual amortization of bond discount = Total discount /number of years to maturity

                 = 7250 /20

                 = 362.5 per year

Period of amortization= 1Jan 2019 - 31Dec 2024 = 6 years

amortization of the discount is recorded on the bonds for the entire period from January 1, 2019, through December 31, 2024 = 362.5 *6 = 2175

3)carrying value = Issue price + total discount amortized

             = 282,750 +2175

             = 284925

4)

Date Account title Debit credit
Jan 1 2025 Bond payable 290000
loss on retirement of bond payable 18125
Discount on bond payable 5075
cash 303,050

Discount still unamortized = 290000-284925 = 5075

jeff jeffy answered 2 years ago
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