In: Accounting
On May 1, 2019, Star Corporation issued $440,000 face value, 10
percent bonds at 98.6. The bonds are dated May 1, 2019, and mature
10 years later. The discount is amortized on each interest payment
date. The interest is payable semiannually on May 1 and November 1.
On May 1, 2021, after paying the semiannual interest, the
corporation purchased the outstanding bonds from the bondholders
and retired them. The purchase price was 99.0.
Required:
Prepare the entry in general journal form to record the repurchase
and retirement of the bonds. (Use the Loss on Early
Retirement of Bonds account.)
Analyze:
If Star Corporation did not purchase the outstanding bonds, what
total bond interest expense would have been incurred over the life
of the bonds?
Face value of the bonds = $440,000
Issue price of the bonds = $440,000 x 98.6% = $433,840
Discount on bonds payable = $440,000 - $433,840 = $6,160
Number of semiannual periods over the life of the bonds = 10 x 2 = 20
Discount amortized for each semiannual period = $6,160/20 = $308
Number of semiannual periods expired from May 1, 2019 through May 1, 2021 = 4
Discount amortized from May 1, 2019 through May 1, 2021 = $308 x 4 = $1,232
Unamortized discount on May 1, 2021, after paying semiannual interest = $6,160 - $1,232 = $4,928
Cash paid to repurchase the bonds = $440,000 x 99% = $435,600
Required:
Prepare the journal entry to record the repurchase and retirement of the bonds as follows:
Analyze:
If the company did not purchase the outstanding bonds, the total bond interest expense would be the sum of total cash interest paid and the total discount on bonds payable.
Total bonds interest expense = ($440,000 x 5% x 20) + $6,160 = $446,160