Question
In: Accounting
On 3/1/16, Lawrence Company sold 6% bonds having a maturity value of 300,000 at a price...
On 3/1/16, Lawrence Company sold 6% bonds having a maturity value of 300,000 at a price which provides the bondholders with a 8% yield. The bonds are dated 3/1/21 with interest payable semiannually on 3/1 and 9/1 of each year. The bonds are callable at 101 any time after 1/1/17.
a. Prepare the amortization table and all journal entries
required in 2016.
b. On 6/1/18, Lawrence called the bond and retired them. Prepare
all journal entries required in 2018.
Solutions
Expert Solution
| Par value of Bonds | 300000 | |||||
| Cash interest paid (300000*6%*6/12) | 9000 | |||||
| Annuity PVF for 15 yrs at 8% | 17.292 | |||||
| PVF at 8% for Year-15 | 0.3083 | |||||
| Present value of Bonds | 92490 | |||||
| Present value of Interest | 155628 | |||||
| Issue price | 248118 | |||||
| Amort Chart: | ||||||
| Date | Cash | Interest | Discount | Unamortized | Carrying Value | |
| Interest | expenses | Amortized | Discount | Of bonds | ||
| 01.03.2016 | 51882 | 248118 | ||||
| 01.09.2016 | 9000 | 9925 | 925 | 50957 | 249043 | |
| 01.03.2017 | 9000 | 9962 | 962 | 49995 | 250005 | |
| 01.09.2017 | 9000 | 10000 | 1000 | 48995 | 251005 | |
| 01.03.2018 | 9000 | 10040 | 1040 | 47955 | 252045 | |
| 01.09.18 | 9000 | 10082 | 1082 | 46873 | 253127 | |
| Journal entries for 2016: | ||||||
| Date | Accounts title and explanations | Debit $ | Credit$ | |||
| 01.03.16 | Cash account Dr. | 248118 | ||||
| Discount on Bonds payable Dr. | 51882 | |||||
| Bonds payable | 300000 | |||||
| 01.09.2016 | Interest expense Dr. | 9925 | ||||
| Cash account | 9000 | |||||
| Discount on bonds payable | 925 | |||||
| 31.12.16 | Interest expense Dr. (9962*4/6) | 6641 | ||||
| Interest payable (9000*4/6) | 6000 | |||||
| Discount on Bonds payable (962*4/6) | 641 | |||||
| Req b: | ||||||
| Interest expense on June1 2018: | ||||||
| Cash interest to be paid (300000*6%*3/12) | 4500 | |||||
| Discount to be amortized (1082*3/6) | 541 | |||||
| Interest expense on June1 2018: | 5041 | |||||
| Book value of Bonds on June 1 2018: | ||||||
| Carrying value of Bonds on 01.03.2018 | 252045 | |||||
| Add: Discount amortized on 01.06.2018 | 541 | |||||
| Book value of Bonds on June 1 2018: | 252586 | |||||
| Less: Redemption value | 303000 | |||||
| Loss on redemption | 50414 | |||||
| Journal entries: | ||||||
| Date | Accounts title and explanations | Debit $ | Credit$ | |||
| 01.06.18 | Interest expense Dr. | 5041 | ||||
| Cash account | 4500 | |||||
| Discount on Bonds payable | 541 | |||||
| 01.06.18 | Bonds payable Dr. | 300000 | ||||
| Loss on redemption of bonds Dr. | 50414 | |||||
| Cash account | 303000 | |||||
| Discount on bonds payable | 47414 | |||||
| (47955-541) | ||||||
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