Chapter 14, Problem 9E

To determine

Issue of bond at discount:

When the coupon rate or contract rate of a bond is lower than the market interest rate, the bond is being issued at discount. The selling price of the bond will be lower than the face value of the bond under issue of bond at discount.

To determine:

1. How much does the company receive when it issues the bonds on January 1, 2017?

2. Compute the amount of discount on the issuance.

3. How much amortization is recorded on the bonds for the entire period from January 1, 2017, through December 31, 2022?

4. What is the carrying value of the bonds as on December 31, 2022 and what is carrying value of the 20% soon-to-be retired bonds on this same date?

5. How much did the company pay on January 1, 2023, to purchase the bonds that it retired?

6. What is the amount of the recorded gain or loss from retiring the bonds?

7. Prepare the journal entry to record the bonds retirement at January 1, 2023.

Answer to Problem 9E

Solution:

1. The company received cash proceeds of $684,250 on the issue on bonds.

2. The amount of discount on the bonds is $15,750.

3. $6,300 of discount amortization is recorded on the bonds as December 31, 2022.

4. On December 31, 2022, the carrying value as of the bonds as of the close of business is $690,550 and carrying value of 20% soon-to-be retired bonds is $138,110.

5. The company paid a sum of $146,300 to purchase the bonds.

6. Shay Company incurred a loss of $8,190 on the retirement of bonds payable.

7.

Date	General journal	Debit	Credit
2023
Jan. 1	Bonds Payable	$140,000
	Loss on Retirement of Bonds Payable	$8,190
	Discount on Bonds Payable		$1,890
	Cash		$146,300

Explanation of Solution

Explanation:

1.

$\begin{array}{l}ComputationofCashproceedsfrombondsissuance\hfill \\ \hfill \\ CashProceedsfromBondsIssuance=\$700,000X97.75\%\hfill \\ =\$684,250\hfill \end{array}$

2.

$\begin{array}{l}DiscountonBondsPayable=ParValueofbondspayable–IssuePriceofbondspayable\hfill \\ =\$700,000-\$684,250\hfill \\ =\$15,750\hfill \end{array}$

3. Computation of discount to be amortize from January 1, 2017 to December 31, 2022

$\begin{array}{l}DiscountAmortization=40\%oftotaldiscountonbondspayable\hfill \\ =0.40X15,750\hfill \\ \begin{array}{l} =\$6,300\\ *January1,2017toDecember31,2022consistofsixyearswhichis40\%of\\ bondspayabletermof15years.\end{array}\hfill \end{array}\begin{array}{l}\hfill \\ \hfill \end{array}$

4.

$\begin{array}{l}CarryingvalueofthebondsasofthecloseofbusinessonDecember31,2022\hfill \\ \hfill \\ =ParValueofbondspayable–UnamortizedDiscount\hfill \\ =\$700,000-\$9,450\hfill \\ =\$690,550\hfill \\ \hfill \\ Carryingvalueofthe20\%soon-to-beretiredBonds\hfill \\ \hfill \\ =20\%ofParValueofbondspayable–20\%ofUnamortizedDiscount\hfill \\ =\$140,000-\$1,890\hfill \\ =\$138,110\hfill \end{array}$

5. Computation of purchasing price of bonds retired

$\begin{array}{l}=20\%ofParvalueofbondspayableXPurchasingPrice\hfill \\ =\$140,000X104.50\%\hfill \\ =\$146,300\hfill \end{array}$

6. Gain or Loss on Retiring of Bonds

$\begin{array}{l}Gainorlossonretirementofbondspayable=CarryingValue–PurchasePrice\hfill \\ =\$138,110-\$146,300\hfill \\ =\$8,190\hfill \end{array}$

7.

When carrying value of the bond is less the purchasing price, there is a loss on retirement of bonds payable and if the carrying value of bonds is more than the purchasing price, there is a gain on retirement of bonds payable.

Conclusion

Conclusion:

Shay Company issued $700,000 10%, 15 year bonds at $684,250 with a discount of $15,750 and retired 20% of it for $146,300 and incurred a loss of $8,190