Question

on January 1, 2014 baseline Corp. issued $20,000,000 of 12 %, Twenty-year bonds at 102. the bonds are callable at 105. Interest on the bond is payable annualy. Baseline uses the Stright-line method to amortize bond premium or discount. On january1, 2018, Baseline Called 5,000,000 of the issue and retired the bond.

Required

a) prepare the journal entry to record the issuance of the bonds on January 1, 2014

b) prepare the journal entry to record the retirement of the bonds on january 1, 2018.

Answer 1

• All working forms part of the answer
• Requirement ‘a’

--Working

Working		Total
A	Face Value	$20,000,000
B = A x 102/100	Issue value	$20,400,000
C = B - A	Premium on Bonds payable	$400,000

--Journal Entry

Date	Accounts title	Debit	Credit
1 Jan 214	Cash	$20,400,000
	Premium On Bonds Payable		$400,000
	Bonds Payable		$20,000,000
	(Issuance of the Bonds)

• Requirement ‘b’

--Working

Working		Bonds Called on 1 Jan 2018
A	Face Value	$5,000,000
B = A x 102/100	Issue value	$5,100,000
C = B - A	Premium on Bonds payable	$100,000
D	Term [years]	20
E = C/D	Annual Straight Line Amortisation	$5,000
F = 2014,2015,2016,2017	No. of years till 31 Dec2017	4
G = E x F	Premium Amortised	$20,000
H = C - G	Unamortised Premium	$80,000
I = A + H	Carrying Value at the time Bonds were called	$5,080,000
J = 5000000 x 105/100	Called at	$5,250,000
K = J - I	Loss on Retirement of Bonds	$170,000

--Journal Entry on retirement

Date	Accounts title	Debit	Credit
Jan-18	Bonds Payable	$5,000,000
	Premium On Bonds Payable	$80,000
	Loss on Retirement of Bonds	$170,000
	Cash		$5,250,000
	(Bonds retired)