Question

On June 30, 2009, Larkspur Company issued 12% bonds with a par value of $840,000 due in 20 years. They were issued at 98 and were callable at 103 at any date after June 30, 2017. Because of lower interest rates and a significant change in the company’s credit rating, it was decided to call the entire issue on June 30, 2018, and to issue new bonds. New 10% bonds were sold in the amount of $920,000 at 102; they mature in 20 years. Larkspur Company uses straight-line amortization. Interest payment dates are December 31 and June 30.

(a)		Prepare journal entries to record the redemption of the old issue and the sale of the new issue on June 30, 2018.
(b)		Prepare the entry required on December 31, 2018, to record the payment of the first 6 months’ interest and the amortization of premium on the bonds.

(Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Answer 1

	WN
	Compute the un amortized discount
	Discount at time of issue			$840,000
		$840000*98/100		$823,200
				$16,800
	Less Discount amortized till June			$7,560
	(16800/40*18)
	un amortized discount			$9,240
	Compute the loss on redemption as below:
	Redemption of Bonds	$840000*103/100		$865,200
	Less Carrying value	$840000-$9240		$830,760
	Loss on Redemption			$34,440
a	Old Bond Redemption
Date	Account Title and Explanation	Debit $	Credit $
30/06/2018	12% Bonds Payable	840000
	Loss on retirement of bonds	34440
	Cash		865200
	Discount on bonds		9240
	to record redemption of old
	bonds
	New Bond Issue
Date	Account Title and Explanation	Debit $	Credit $
30/06/2018	Cash-920000*102/100	938400
	10% Bonds Payable-920000*100/100		920000
	Premium on Bonds-920000*2/100		18400
	to record issue of new bonds at premium
b
Date	Account Title and Explanation	Debit $	Credit $
31/12/2018	Interest Expense	46000
	Cash-920000*10%*6/12		46000
	to record the interest expense
31/12/2018	Premium on Bonds Payable-18400/40	460
	To Bond Amortization		460
	to record bond amortization