Question

Q#1.

This question consists of 2 independent sub-questions

1.DISTAFF & SPEAR, Inc., issued $250,000 of 8%, 15-year bonds at 103 on July 1, 2007. Interest is payable semi-annually on December 31 and June 30. Through June 30, 2014 DISTAFF & SPEAR amortized $3,186 of the bond premium. On July 1, 2014 DISTAFF & SPEAR retired bonds at 98. Prepare journal entries to record (i) issue and (ii) retirement of these bonds. (Assume the June interest expense has already been recorded.)

2. At t=0, Queen Safa, Inc, issued a $100,000 B/P for 20 years (due at t=20). At the end of every year for 10 years, the bond pays interest (coupons) of 12% per year. [For t=1,2,...,10] Then for the remaining 10 years, the bond pays interest of 6% per year. [For t=11,12,...,20] At the end of the 18th year, at t=18, after paying the annual interest, Queen Safa redeems the bond at 88. The bond is priced to yield 10% per year. Prepare journal entries to record (i) issue and (ii) retirement of these bonds. (Assume the June interest expense has already been recorded.)

The factor for ordinary annuity for 10 years at 10% is 6.14457

The present value factor for 10 years at 10% is 0.38554; for 20 year, it is 0.14864

Answer 1

1
July, 1 2007	Cash A/c	257500		(250000/100*103)
	To Premium on bonds payable		7500
	To 8% Bonds Payable		250000
	(to book issue of 8% 15 years bonds issued at $3 premium)
July, 1 2014	8% Bonds Payable	250000
	Unamortised premium on bonds	4314		(7500-3186)
	To profit on redemption of bonds		9314	balancing figure	( it is total of ($2 * 2500) and unamortised balance of premium on issue
	To Cash		245000	(250000/100*98)	because redeemed at $98
	( to book redemption of bonds)
	( as we have redeemed at 98 instead of its face value 100 so there is profit of 100-98=$ 2 per bond on redemption, in addition to that any balance in premiun on bonds issued will be recognised as profit and transferred to P&L as there will not be any future interest expenses against which it can be adjusted