On October 1, ABC Company issues $1,400,000 face value 5%, 10-year bonds when the market for...

On October 1, ABC Company issues $1,400,000 face value 5%, 10-year bonds when the market for ABC bonds required a 6% yield. Interest is paid annually on October 1. ABC’s fiscal year ends December 31.

Required:

Determine the issue price of the bonds and prepare the journal entry to record the issuance.
Prepare all entries related to these bonds at December 31, 2019, October 1 and December 31, 2020. Use the effective interest method to amortize premium or discount, if any.
Assume the bonds are callable at 101 and ABC decides to redeem $700,000 of the bonds on October 1, 2021. Prepare the entry(ies) required to record the partial redemption.

Expert Solution

1.

Issue price of bonds

$ 12,96,959

Date	Account Title	Debit	Credit
01-Oct	Cash	$ 12,96,959
	Discount on bonds payable	$ 1,03,041
	Bonds Payable		$ 14,00,000
	(To record issue of bonds )

Working:

Face value (FV)	$ 14,00,000.00
Coupon rate	500%
Number of compounding periods per year	1
Interest per period (PMT) (1400,000 * 5%)	$ 70,000.00
Number of years to maturity	10 Years
Number of compounding periods till maturity (NPER) (10 * 1)	10
Market rate of return/Required rate of return (RATE)	6%

Issue price of bonds	PV(RATE,NPER,PMT,FV)*-1
Issue price of bonds	$ 12,96,959

2.

Date	Account Title	Debit	Credit
31-12-2019	Interest Expense (12969596%3/12)	$ 19,454
	Discount on bonds payable		$ 1,954
	Interest Payable (70000*3/12)		$ 17,500
	(To record interest expense )

01-10-2020	Interest Payable	$ 17,500
	Interest Expense (1296959+1954)6%9/12	$ 58,451
	Discount on bonds payable		$ 5,951
	Cash		$ 70,000
	(To record interest payment )

31-12-2020	Interest Expense (1296959+1954+5951)6%3/12	$ 19,573
	Discount on bonds payable		$ 2,072
	Interest Payable		$ 17,500
	(To record interest expense )

3.

Date	Account Title	Debit	Credit
01-10-2021	Cash	$ 7,07,000
	Loss on redemption of bond	$ 41,375
	Discount on bonds		$ 48,375
	Bonds Payable		$ 7,00,000

ekkarill92 answered 2 years ago

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