Question

On January 1, 2017, Shay issues $290,000 of 11%, 20-year bonds at a price of 97.50. Six years later, on January 1, 2023, Shay retires 20% of these bonds by buying them on the open market at 104.50. All interest is accounted for and paid through December 31, 2022, the day before the purchase. The straight-line method is used to amortize any bond discount.

A. How much does the company receive when it issues the bonds on January 1, 2017?
B.  What is the amount of the discount on the bonds at January 1, 2017?

C. How much amortization of the discount is recorded on the bonds for the entire period from January 1, 2017, through December 31, 2022?

D. What is the carrying (book) value of the bonds and the carrying value of the 20% soon-to-be-retired bonds as of the close of business on December 31, 2022?

E. How much did the company pay on January 1, 2023, to purchase the bonds that it retired?

F. Prepare the journal entry to record the bond retirement at January 1, 2023.

Answer 1

Solution A:

Amount received on issue of bonds on Jan 1 2017 = $290,000*97.5% = $282,750

Solution B:

Amount of the discount on the bonds at January 1, 2017 = $290,000 - $282,750 = $7,250

Solution C:

Amortization of the discount is recorded on the bonds for the entire period from January 1, 2017, through December 31, 2022 = $7,250 / 20*6 = $2,175

Solution D:

Carrying value of bonds on Dec 31, 2022 = Face value - Unamortized discount = $290,000 - ($7,250 - $2,175)

= $284,925

Carrying value of the 20% soon-to-be-retired bonds as of the close of business on December 31, 2022 = $284,925 * 20% = $56,985

Solution E:

Amount to be paid on Jan 1, 2023 to purchase the bonds that it retired = $290,000*20%*104% = $60,320

Solution F:

Journal Entries
Date	Particulars	Debit	Credit
1-Jan-23	Bond Payable Dr	$58,000.00
	Loss on retirement of bond Dr	$3,335.00
	To Cash		$60,320.00
	To Discount on Bond payable		$1,015.00
	(To record bond retirement)