Question

Holiday Company issued its 2%, 10-year bonds in the principal amount of $3,000,000 on January 2, 2003, at a discount of $255906, which it proceeded to amortize by charges to expense over the life of the issue on an effective interest basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 104% of the principal amount, but it did not provide for any sinking fund.


On December 1, 2007, the company issued its 11%, 20-year debenture bonds in the principal amount of $4,000,000 at 102, and the proceeds were used to redeem the 2%, 10-year mortgage bonds on January 2, 2008. The indenture securing the new issue did not provide for any sinking fund or for retirement before maturity.


Instructions

(b) prepare the journal entires on 1/2/03;12/31/03;12/31/04

(c) Prepare journal entries to record the issuance of the new bonds and the retirement of the 2% bonds.

(d) Indicate the income statement treatment of the gain or loss from retirement and the note disclosure required.

Answer 1

	Solution:
		Journal Entries
b)	Date	Particulars	Debit	Credit
	01-02-2003	Cash	2744094
		Discount on Issue of Bond	255906
		2% Bond		3000000
		(Record the issue of bond)
	31-12-2003	Interest Expenses	60000
		Cash		60000
		(Record the interest paid)
		Profit and Loss Account	25590.6
		Discount on Issue of Bond		25590.6
		(Record the amortization of discount expenses)
	31-12-2004	Interest Expenses	60000
		Cash		60000
		(Record the interest paid)
		Profit and Loss Account	2559.06
		Profit and Loss Account		2559.06
		(Record the amortization of discount expenses)
c)	01-12-2007	Cash	4080000
		11% Debenture		4000000
		Premium on issue of debenture		80000
		(Record the issue of 11% debenture)
	02-01-2008	2% Bond	3000000
		Loss on bond redemption	120000
		Cash		3120000
		(Record the bond redemption entry)
d)	The Loss on redemption of the bond should be adjusted with the preimum on issue of debenture.
	And the balance amount should be adjusted with the reserve and surplus, because the loss arises due to redemption
	of the bond is the capital loss and the same should be adjusted with other capital gain.