Question

(Show Work and Calculations)

On January 2, 2011 N&M Company issued $1 Million of 5-year, 3% bonds for $940,000, their interest payable semiannually every June 30, and Deember 31. N&M uses stright line amortization, having judged the difference under the effective interest method to be immaterial.

On February 28, 2015, N&M retired $100,000 of the bonds at 98.

Prepare the journal entries N&M should have made on each of the following dates:

1. February 28, 2015. 2. June 30, 2015.

Answer 1

Discount on bonds issued = face value - issue price = $1,000,000 - $940,000 = $60,000

Discount amortization per year = Total discount/ number of years to retirement = $60,000/5 = $12,000

On feb 28, 2015 only 10 months of discount balance is left of the 5 years = 60,000 X 10/60 = 10,000

Discount balance applicable to retired bonds = $10,000 X $100,000/$1,000,000 = $1,000

Discount amortization for 2 months from Jan 1 to Feb 28, 2015 = $12,000 X 2/12 X100,000/1,000,000= $200

Discount amortization applicable to bonds retired = $2,000 X $100,000/ $1,000,000 = $200

Book value of bonds retired = Face value - discount balance = $100,000 - $1,000 = $99,000

Redemption value = $100,000 X 98% = $98,000

Bonds are redeemed for discount. Discount on redemption of bonds = Book value - redemption value = $99,000 - $98,000

Entry on February 28, 2015:

Account	Debit	Credit
Interest expense	200
Discount on bonds payable		200
[Entry to record discount amortization of bonds retired]
Bonds payable	$       100,000
Discount on bonds payable		$    1,000
Discount on redemption of bonds		$    1,000
Cash		$ 98,000
[Entry to record retirement of bonds payable]

Entry on June 30, 2015.

Account	Debit	Credit
Interest expense	5400
Discount on bonds payable		5400
[Entry to record discount amortization of bonds payable]

Workings for above entry:

Balance in bonds payable = Bonds issued - bonds retired = $1,000,000 - $100,000 = $900,000

Discount on bonds payable applicable to the bonds not retired = $60,000 X $900,000/$1,000,000 = $54,000

Discount amortization for six months = $54,000/5 X 6/12 = $5400