Question

On April 1, 2015, Tequila Mockingbird Bar&Grill, Inc. issued $62,500 of 8-year bonds payable at 95. The bonds bear interest at 4.8%. Interest is payable semi-annually on June 30 and December 31 each year.

Using all of the proceeds-not face value-from the bond issuance, on the same day, it purchased fixed assets for its operations, and allocated the proceeds from the bond issuance as follows:

75% for new kitchen equipment with a 10-year useful life, and a sales value of $3200, for which it uses straight-line

25% for new furniture with a 5-year useful life, and a salvage value is $1,500, for which it uses double-declining balance

On January 2, 2018, after it makes the required interest payment the required interest payment on bonds payable， just for the Halibut Restaurant Co. redeems all of the bonds at 107. And, on the same date, it sells all of the equipment for $36,500.

What is the balance in Discount on Bonds Payable or Premium on Bonds Payable, whichever is applicable, on January 1, 2018, before any redemption occurred?

What is the gain or loss Just for the Halibut Restaurant Co would replication on the redemption of all of the bonds on January 2, 2018?

What is the gain or loss just for the Halibut Restaurant Co would replication on the sale of the equipment on January 2, 2018?

Answer 1

1.Balance in Discount on Bonds on January1,2018 after the interest payment = $60,449.22

Working:

The amortization schedule for the bond issue is given below.

Date	Cash	Interest	Discount	Balance of	Book Value	Face Value
	Payment	Expense	amortized	discount
4/1/2015				3125.00	59375.00	62500.00
6/1/2015	750.00	847.66	97.66	3027.34	59472.66	62500.00
12/1/2015	750.00	945.31	195.31	2832.03	59667.97	62500.00
6/1/2016	750.00	945.31	195.31	2636.72	59863.28	62500.00
12/1/2016	750.00	945.31	195.31	2441.41	60058.59	62500.00
6/1/2017	750.00	945.31	195.31	2246.09	60253.91	62500.00
12/1/2017	750.00	945.31	195.31	2050.78	60449.22	62500.00
6/1/2018	750.00	945.31	195.31	1855.47	60644.53	62500.00
12/1/2018	750.00	945.31	195.31	1660.16	60839.84	62500.00
6/1/2019	750.00	945.31	195.31	1464.84	61035.16	62500.00
12/1/2019	750.00	945.31	195.31	1269.53	61230.47	62500.00
6/1/2020	750.00	945.31	195.31	1074.22	61425.78	62500.00
12/1/2020	750.00	945.31	195.31	878.91	61621.09	62500.00
6/1/2021	750.00	945.31	195.31	683.59	61816.41	62500.00
12/1/2021	750.00	945.31	195.31	488.28	62011.72	62500.00
6/1/2022	750.00	945.31	195.31	292.97	62207.03	62500.00
12/1/2022	750.00	945.31	195.31	97.66	62402.34	62500.00
4/1/2023	750.00	847.66	97.66	0.00	62500.00	62500.00
Face Value of the bond			62500.00
Issued at 95
Cash received = 62,500 x 95%			59375.00
Discount			3125.00
This will be amortized over 16 semi-annual
periods.

2. Loss on redemption of all the bonds = $64,824

Working:

Redemption price	A	66875
Balance of discount account	B	60449
Total (A+B)	C	127324
Face value of the bond	D	62500
Loss on retirement of bonds (D-E)	E	64824

  

3. Gain on sale of equipment on 1/2/2018 $3,975

Working:

  

Proceeds from the inssue of bonds		59375
Allocated to equipment (75%)		44531
Cost of equipment		44531
Salvage value		3200
Depreciable value		41331
Estimated life   - years		10
Annual depreciation		4133
Depreciation for 2015 (9 months)		3100
Depreciation for 2016		4453
Depreciation for 2017		4453
Accumulated depreciation on 1/1/18		12006
Book value on 1/1/18		32525
Sale value of the equipment		36500
Gain on sale of equipment		3975