In: Accounting
The December 31, 2017, balance sheet of Hess Corporation includes the following items:
9% bonds payable due December 31, 2026 $5,000,000
Unamortized premium on bonds payable 135,000
The bonds were issued on December 31, 2016, at 103, with interest payable on July 1 and December 31 of each year. Hess uses straight-line amortization. On March 1, 2018, Hess retired $2,000,000 of these bonds at 98 plus accrued interest. What should Hess record as a gain on retirement of these bonds? Ignore taxes.
a. $94,000.
b. $54,000.
c. $93,000.
d. $100,000.
Correct answer-----------(c) $93,000
Working
Date | Accounts title and explanation | Debit | Credit |
March 1 | Bonds payable | $ 2,000,000.00 | |
Premium on bonds payable | $ 53,000.00 | ||
Gain on redemption of bonds | $ 93,000.00 | ||
Cash | $ 1,960,000.00 | ||
(To record redemption of bonds) |
.
Face value of Bond redeemed | $ 2,000,000.00 |
Equivalent Unamortized premium on dec 31 2017 | $ 54,000.00 |
Less: Premium to be amortized for 2 month (january and february 2018) | $ 1,000.00 |
Total unamortized premium on bond of $2000000 (54000-1000) | $ 53,000.00 |
.
Issue price | $ 5,150,000.00 |
Face value of Bond redeemed | $ 5,000,000.00 |
Premium on bonds | $ 150,000.00 |
Less: Unamortized premium on bonds payable on decembe 31 2017 | $ 135,000.00 |
Premium amortized in 1 year | $ 15,000.00 |
Premium to be amortized for 2 months (15000/12*2) | $ 2,500.00 |
Equivalent premium to be amortized on $2000000 bonds | $ 1,000.00 |