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1) Record the settlement of debt. A company has $500,000 of 6% semiannual, 6 year term...

1) Record the settlement of debt.

A company has $500,000 of 6% semiannual, 6 year term bonds outstanding. The bonds sold originally for $506,000 on January 1, 2015.   Interest payment dates are January 1 and July 1.    It is now September 1, 2018. The company has been handling the premium using straightline amortization. The company calls the bonds at their call price of 1.03.   

Remember, accrued interest must be paid and the premium must be amortized.

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Expert Solution

Pr value of bonds 500,000
Statted rate of interest 6%
Issue price 506000
Premium on bonds 6000
Period of bonds 12
Semi Annual Amortization 500
Cash interest semi annual 15000
Total Period expire before retirement 7 periods
Premium Amortized 3500
On Retirement on Sep1:
Interest accrued for 2 months 5000
(500000*6%*2/12)
Premium amortized 167
(500*2/6)
Unamortized Premium 2333
(6000-3500-167)
Par value of bonds 500000
Total Book value of bonds 502333
Less: Retirement price 515000
(500000*1.03)
Loss on retirement of bonds 12667
Journal entry:
1-Sep Interest expense Dr. 4833
Premium on Bonds payable Dr. 167
      Cash account 5000
1-Sep Bonds payable Dr. 500000
Premium on Bonds payable Dr. 2333
Loss on retirement of bonds Dr. 12667
         Cash account 515000

ekkarill92 answered 1 year ago
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