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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Hill Corporation issued $1,500,000 of 11% bonds at 98 on January 2, 2019. Interest is paid semiannually on June 30 and December 31. The bonds had a 10-year life from the date of issue, and the company uses the straight-line method of amortization. On March 31, 2022, Hill recalls the bonds at the call price of 107 plus accrued interest.

Required:

Prepare the journal entries to record the reacquisition (recall) of Hill’s bonds.

To determine

Prepare the journal entry to record the reacquisitions of bonds.

Explanation

Retirement of bonds before maturity: When bonds mature before maturity date, those bonds are called callable bonds. They are paid off at a specific price by providing an incentive to the holder.

Prepare journal entry to record retirement of bonds before maturity.

DateAccount titles and ExplanationDebitCredit
March 31, 2022Bonds payable$1,500,000  
 Loss on Bonds redemption (3)$125,250  
 Interest payable (1)$41,250  
      Discount on bonds payable (2) $20,250
      Cash (4) $1,646,250
 (To record redemption of bonds before the maturity period)  

Table (1)

  • Bonds payable is a liability, and it is decreased. Therefore, debit bonds payable account for $1,500,000.
  • Loss on redemption of bonds is a component of stockholders’ equity, and it increases expense accounts. Therefore, debit loss on redemption of bonds account for $125,250.
  • Interest payable is a current liability, and it is decreased. Therefore, debit interest payable account for $41,250.
  • Discount on bonds payable is a contra liability, and it is decreased. Therefore, credit discount on bonds payable account for $20,250.
  • Cash is a current asset, and it is decreased. Therefore, credit cash account for $1,646,250.

Working notes:

(1)Calculate interest payable.

Interest payable =Face value of bonds ×Stated interest rate×Time period=$1,500,000×11%×312=$41,250

(2)Calculate discount on bonds payable (unamortized discount)

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