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The following information is taken from Grouper Corp.’s balance sheet at December 31, 2016. Current liabilities...

The following information is taken from Grouper Corp.’s balance sheet at December 31, 2016.

Current liabilities
    Interest payable $ 89,000
Long-term liabilities
    Bonds payable (7%, due January 1, 2027) $3,360,000
    Less: Discount on bonds payable 33,600 3,326,400


Interest is payable annually on January 1. The bonds are callable on any annual interest date. Grouper uses straight-line amortization for any bond premium or discount. From December 31, 2016, the bonds will be outstanding for an additional 10 years (120 months).

(a) Journalize the payment of bond interest on January 1, 2017.
(b) Prepare the entry to amortize bond discount and to accrue the interest on December 31, 2017.
(c) Assume on January 1, 2018, after paying interest, that Grouper Corp. calls bonds having a face value of $560,000. The call price is 102. Record the redemption of the bonds.
(d)

Prepare the adjusting entry at December 31, 2018, to amortize bond discount and to accrue interest on the remaining bonds.

Solutions

Expert Solution

(a) Journal entry for payment of interest

Interest Payable Dr 89000
To Cash 89000 (Cr)
Note- It is assumed that bond is issued during the year 2016. Hence, whatever interest accrued as aon balance sheet date is paid on 1st Jan, 2017.

(b) Journal entry as on Dec 31, 2017

Interest Expense (3360000*7%) Dr 235200

To Interest Payable   235200 (Cr)
(Being interest accrued for the year 2017)

Profit and Loss Dr 238560
To Discount on Bonds (33600*12/120) 3360 (Cr)
To Interest Expense 235200 (Cr)
(Being discount on bonds written off and interest expense transferred to profit and loss)

(c) Redemption on bonds
 7% Bond Dr 560000
Premium on redemption (560000*2/100) Dr 11200
To Bond holder 571200

Bond Holder Dr 571200
To Cash 571200

Profit and Loss Dr 11200
To Premium on redemption 11200

(d) Journal entry as on Dec 31, 2018

Interest Expense (3360000-560000)*7% Dr 196000
To Interest Payable 196000

Profit and Loss Dr 203840
To Interest Expense 196000
To Discount on bonds (refer Note below) 7840

Note-

Face Value of Bond redeemed- 560000
Discount on bond balance as on Dec 31, 2017- 33600-3360= 30240
% of Bond redeemed- 560000/3360000= 1/6th
Discount on bond to be written off immediately on redemption- 30240*1/6= 5040
Balance Discount to be left after redemption- 30240-5040= 25200
Discount written off on balance bond= 25200*12/108= 2800

Hence, Total Discount on bonds written off during the year 2018= 5040+2800= 7840

   

ekkarill92 answered 1 year ago
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