Question

1. On January 1st, SGMI Co. issued a $795,000, 6.4% semiannual, 10-year bond to yield 7%. On October 31st, the company called 10% of the bonds for 102 plus accrued interest. Please create the journal entry and amortization table for this transaction.

Answer 1

Face value of the bonds called = $795,000 x 10% = $79,500

Semi-annual interest payment = $79,500 x 6.4% x (6 months/12 months) = $2,544

Cash received for $79,500:

Present value of the interest payment	$36,156
[$2,544 x 14.2124 present value annuity factor (3.5%, 20 years)]
Present value of the face value	$39,957
[$79,500 x 0.5026 present value factor (3.5%, 20 years)]
Cash received	$76,113

Amortization Table:

Date	Interest Expense	Interest Paid	Discount Amortization	Carrying value of the bonds
Jan 1, Year 1				$76,113
June 30, Year 1	$2,664	$2,544	$120	$76,233
Oct 31, Year 1	$1,779	$1,696	$83	$76,316

Interest expense = Preceding carrying value of the bonds x 3.5% (semi-annual interest rate)

Discount amortized = Interest expense - Interest paid

Carrying value of the bonds = Preceding carrying value of the bonds + Discount amortization

On Oct 31, Year 1:

Interest expense = $76,233 x 7% x (4 months/ 12 months) = $1,779

Interest paid = $79,500 x 6.4% x (4 months/ 12 months) = $1,696

Journal Entry:

Date	Account title and explanation	Debit	Credit
Oct 31, Year 1	Bonds payable	$79,500
	Interest expense	$1,779
	Loss on redemption of bonds	$1,590
	Discount on bonds payable		$83
	Cash*		$82,786
	[To record redemption of bonds]

*Cash paid = (Face value x 1.02) + Accrued interest

= ($79,500 x 1.02) + $1,696

= $81,090 + $1,696

=$82,786