Question

In: Accounting

On May 1, 2019, Star Corporation issued $440,000 face value, 10 percent bonds at 98.6. The...

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?

Solutions

Expert Solution

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


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