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Problem 4: Long-Term Liabilities 1.    On March 31, 2013, Peppermint Patty Corp. sold $1,000,000 (par value)...

Problem 4: Long-Term Liabilities

1.    On March 31, 2013, Peppermint Patty Corp. sold $1,000,000 (par value) 8%, 10-year bonds for $961,500 including accrued interest. The bonds were dated January 1, 2013. Interest is paid semi-annually on January 1 and July 1. On April 1, 2017, Peppermint Patty purchased half of the bonds on the open market at 99 plus accrued interest and retired them. The corporation uses the straight-line method for amortization of bond premiums and discounts.

Instructions

    a.    Calculate the amount of the gain or loss on retirement of the bonds.

    b.    Prepare the journal entries required on April 1, 2017 to record retirement of the bonds. Assume that interest and premium or discount amortization have been recorded through January 1, 2017.

    c.    Prepare the journal entry on July 1, 2017 to record interest and premium or discount amortization.

Solutions

Expert Solution

Solution:

First of all we need discount on issuance of bond = $1,000,000 - ($961,500 - $1,000,000*8%*3/12)

= $58,500

Above amount of discount is to be amortized on SLM basis within 10yrs.

a. Computation of gain or loss on retirement:

Loss on retirement = Amount paid - Carrying of bonds on retirement

   = ($1,000,000×1/2)×0.99 - (Par value of retired bonds - Unamortized discount )

   = $495,000 - ($1,000,000×1/2 - $58,500×6/10×1/2)

   = $495,000 - $482,450

   = $12,550

b.

c.

ekkarill92 answered 2 years ago
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