Question

On January 1, 2018, ABC Inc. had issued $1,200,000 par value, 7%, five-year bonds at a price of $1,251,176. Interest was payable semiannually on June 30 and December 31. The market rate of interest was 6% on the date the bond were issued.

On March 1, 2019, ABC Inc. extinguished 40% of the bonds outstanding by issuing 15,000 of its common shares. It also paid in cash all interest due up to March 1, 2019 on these bonds. The market value of these shares was $36 per share. Assume the company is using IFRS to account for the bonds.

REQUIRED:

1. Prepare the journal entry to record the interest expense on the bonds payable, on December 31, 2018.

2. Prepare the journal entry to record the payment of interest accrued on the bonds which were retired on March 1, 2019.

3. Prepare the journal entry to record the early retirement of the bonds on March 1, 2019.

Prepare the amortization table.

Answer 1

Journal Entries ($)

A.	December 31, 2018	Interest Expense Dr	37,401.34
		Premium on Bonds Payable Dr	4,598.66
		To Cash		42,000
		(bonds issued at premium)
2.	March 1, 2019	Interest Expense Dr (12421.13*40%)	4,968.52
		Premium on Bonds Payable Dr	631.48
		To Cash (14000*40%)		5,600
		(Interest on bonds retired)
3		Bonds Payable Dr	480,000
		Premium on Bonds Payable Dr(40,533.75*40%)	16,213.50
		Loss on Retirement of Bonds (Balancing Figure)	43,786.50
		To Common Stock /Paid up capital (15000*36)		540,000
		(40% bonds retired)

Amortization Table ($)

Date	Interest Paid	Interest Expense	Premium Amortized	Balance of Premium	Carrying value of Bond
1/1/18				51,176.00	1251,176.00
30/6/18	1200,000*7% /2= 42,000	1251,176*6%/2 = 37,535.28	4,646.72	46,711.28	1246,711.28
31/12/18	42,000	1246,711.28*6%/2 = 37,401.34	4,598.66	42,112.62	1242,112.62
1/3/19	1200,000*7%/2 = 14,000	1242,112.62*6%*2/12 = 12,421.13	1,578.87	40533.75	1240,533.75