Question

on January 1, 2014 baseline Corp. issued $20,000,000 of 12 %, Twenty-year bonds at 102. the bonds are callable at 105. Interest on the bond is payable annualy. Baseline uses the Stright-line method to amortize bond premium or discount. On january1, 2018, Baseline Called 5,000,000 of the issue and retired the bond.

Required

a) prepare the journal entry to record the issuance of the bonds on January 1, 2014

b) prepare the journal entry to record the retirement of the bonds on january 1, 2018.

Answer 1

a) Prepare the journal entry to record the issuance of the bonds on january 1, 2014?

Answer: The bonds face value of $100 each issued at a premium of $2. The journal entry for the same will be as follows:

Date	Account Title	Debit	Credit
January 1, 2014	Cash A/C	$20,400,000
	Premium on Issue of Bonds A/C		$400,000
	12% Bonds		$20,000,000

b)Prepare the journal entry to record the retirement of bonds on January 1, 2018?

Answer: Until now 4 years have been completed the premium on issue of bonds for these $5,000,000 is $100,000 ($5,000,000 X 102%). And this premium has been amortized for years at $5,000 ($100,000 / 20 ) and a total of $20,000 and the remaining balance is $80,000.

And these bonds they have mentioned as callable at $105 at the time of issue, which will also be decreased proportionately for four year and will come down to $104 ($100 + ($5-($5/20 X 4))).

So, the journal entry for retirement will be as follows:

Date	Account Title	Debit	Credit
January 1, 2018	12% Bonds A/C	$5,000,000
	Loss on Retirement of Bonds A/C	$120,000
	Premium on Issue of Bonds A/C	$80,000
	Cash A/C		$5,200,000
	Being bonds retired at callable value.