Exercise 12-3 Retirement of Bonds Payable on the Statement of Cash Flows-Indirect Method LO3 Redstone Inc. has the following debt outstanding on December 31, 2017: 10% bonds payable, due 12/31/21 Discount on bonds payable $500,000 (40,000) $460,000 On this date, Redstone retired the entire bond issue by paying cash of $510,000. Required 1. Identify and analyze the transaction to record the bond retirement. 2. Describe how the bond retirement would be reported on the statement of cash flows assum- ing that Redstone uses the indirect method.

Amortize discount by interest method On the first day of its fiscal year, Ebert Company issued 50,000,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert receiving cash of 43,495,895. The company uses the interest method. A. Journalize the entries to record the following: 1. Sale of the bonds. 2. First semiannual interest payment, including amortization of discount. (Round to the nearest dollar.) 3. Second semiannual interest payment, including amortization of discount. (Round to the nearest dollar.) B. Compute the amount of the bond interest expense for the first year. C. Explain why the company was able to issue the bonds for only 43,495,895 rather than for the face amount of 50,000,000.

MASTERY PROBLEM Jackson, Inc.s fiscal year ends December 31. Selected transactions for the period 20-1 through 20-8 involving bonds payable issued by Jackson are as follows: 20-1 Oct. 31 Issued 600,000 of 10-year, 7%, callable bonds dated October 31, 20-1, for 612,000. Interest is payable semiannually on October 31 and April 30. The bond indenture provides that Jackson is to pay to the trustee bank 20,000 by May 15 of each year (except the tenth year) as a sinking fund for the retirement of the bonds on call or at maturity. Dec. 31 Made the adjusting entry for interest payable and amortized two months premium on the bonds (straight-line method). 20-2 Jan. 2 Reversed the adjusting entry for interest payable and bond premium amortization. Apr. 30 Paid the semiannual interest on the bonds and amortized six months premium. May 15 Paid the sinking fund trustee 20,000. Oct. 31 Paid the semiannual interest on the bonds and amortized six months premium. Dec. 31 Made the adjusting entry for interest payable and amortized two months premium on the bonds. 31 Sinking fund earnings for the year were 900. 20-8 May 15 Paid the sinking fund trustee 20,000. Oct. 31 Paid the semiannual interest on the bonds and amortized six months premium. 31 Redeemed the bonds, which were called at 97. The balance in the bond premium account is 3,600 after the payment of interest and amortization of premium have been entered. The cash balance in the sinking fund is 200,000, which is applied to the redemption. Jackson paid the sinking fund trustee the additional cash needed to pay off the bonds. (Hint: First make the entry for payment to the sinking fund, then make the entry for redemption of the bonds.) REQUIRED 1. Enter the preceding transactions in general journal form. 2. Calculate the carrying value of the bonds as of December 31, 20-2.

Amortize discount by interest method On the first day of its fiscal year, Ebert Company issued 50,000,000 of 10-year, 7% bonds to finance its operations. Interest is payable semiannually. The bonds were issued at a market (effective) interest rate of 9%, resulting in Ebert receiving cash of 43,495,895. The company uses the interest method. A. Journalize the entries to record the following: 1. Sale of the bonds. 2. First semiannual interest payment, including amortization of discount. (Round to the nearest dollar.) 3. Second semiannual interest payment, including amortization of discount. (Round to the nearest dollar.) B. Compute the amount of the bond interest expense for the first year. C. Explain why the company was able to issue the bonds for only 43,495,895 rather than for the face amount of 50,000,000.