Bonds
Bonds are a kind of interest bearing notes payable, usually issued by companies, universities and governmental organizations. It is a debt instrument used for the purpose of raising fund of the corporations or governmental agencies. If selling price of the bond is equal to its face value, it is called as par on bond. If selling price of the bond is lesser than the face value, it is known as discount on bond. If selling price of the bond is greater than the face value, it is known as premium on bond.
Retirement of Bonds
The process of repaying the sale amount of bonds to bondholders at the time of maturity or before the maturity period is called as retirement of bonds. It is otherwise called as redemption of bonds.
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- Wilbury Corporation issued 1 million of 13.5% bonds for 985,071.68. The bonds are dated and issued October 1, 2019, are due September 30, 2020, and pay interest semiannually on March 31 and September 30. Assume an effective yield rate of 14%. Required: 1. Prepare a bond interest expense and discount amortization schedule using the straight-line method. 2. Prepare a bond interest expense and discount amortization schedule using the effective interest method. 3. Prepare adjusting entries for the end of the fiscal year December 31, 2019, using the: a. straight-line method of amortization b. effective interest method of amortization 4. If income before interest and income taxes of 30% in 2020 is 500,000, compute net income under each alternative. 5. Assume the company retired the bonds on June 30, 2020, at 98 plus accrued interest. Prepare the journal entries to record the bond retirement using the: a. straight line method of amortization b. effective interest method of amortization 6. Compute the companys times interest earned (pretax operating income divided by interest expense) for 2020 under each alternative.arrow_forwardBats Corporation issued 800,000 of 12% face value bonds for 851,705.70. The bonds were dated and issued on April 1, 2019, are due March 31, 2023, and pay interest semiannually on September 30 and March 31. Bats sold the bonds to yield 10%. Required: 1. Prepare a bond interest expense and premium amortization schedule using the straight-line method. 2. Prepare a bond interest expense and premium amortization schedule using the effective interest method. 3. Prepare any adjusting entries for the end of the fiscal year, December 31, 2019, using the: a. straight-line method of amortization b. effective interest method of amortization 4. Assume the company retires the bonds on June 30, 2020, at 103 plus accrued interest. Prepare the journal entries to record the bond retirement using the: a. straight-line method of amortization b. effective interest method of amortizationarrow_forwardOn January 1, 2021, Jackie Company issued P8,000,000 8% eight-year bonds. Similar bonds had an effective rate of 8.8%. On yearend, the bonds had a market value quotation of 88. Jackie opted to measure the bonds at fair value. How much is the net effect of bonds on the 2021 Statement of Comprehensive Income? [Indicate whether it is a gain or loss] How much is the discount/premium amortization during 2022? [Indicate whether it is a discount or premium]arrow_forward
- 3. On April 30, one year before maturity, Romo Company retired $300,000 of its 8% bonds payable at the current market price of 102 (102% of the bond face amount, or $300,000 x 1.02 = $306,000). The bond book value on April 30 is $296,100, reflecting an unamortized discount of $3,900. Bondinterest is currently fully paid and recorded up to the date of retirement.What is the gain or loss on retirement of these bonds?a. $6,000 gainb. $9,900 lossc. $3,900 lossd. $3,900 gain 4. Which of the following liability-related accounts is not a balance sheet account?a. Gain on Bond Retirementb. Discount on Bonds Payablec. Mortgage Notes Payabled. Bonds Payable 6. Bushman, Inc., issues $400,000 of 8% bonds that pay interest semiannually and mature in 8 years.Compute the bond issue price assuming that the prevailing market rate of interest is 10% per yearcompounded semiannually.a. $356,648b. $400,000c. $381,293d. $436,172 7. Bushman, Inc., issues $400,000 of zero coupon bonds that mature in 8 years.…arrow_forwardOn January 1, 2014, New Country issued $200,000 of ten-year 8% bonds at 98. These bonds were callable at 102 at any time after three years. Straight-line amortization was used. On January 1, 2018, a new bond issue was sold and the old bonds were called. What was the loss on bond retirement? $8,000 $2,000 $6,400 $4,400arrow_forwardHeller Company issues $760,000 of 10% bonds that pay interest semiannually and mature in 10 years, What is the bonds issue price assuming that the bonds' marker interest rate is 14% per year?Select one a. $655,634 b. $760,000 c. $601,430 d. None of these are correct e. $598,971 Please don't give handwritten answer ..thankuarrow_forward
- On January 1, 2002, Brownies Corp. issued 1,000 of its 10%, P1,000 bonds for P1,040,000. These bonds were to mature on January 1, 2012 but were callable at 101 any time after December 31, 2005. Interest was payable semiannually on July 1 and January 1. On July 1, 2007, Brownie called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Brownies' gain or loss in 2007 on this early extinguishment of debt wasarrow_forwardAQO Company issued P5,000,000, 12% bonds, on July 1, 2014 at 96. The bonds will mature on July 1, 2024.Interest is paid semi-annually on January 1 and July 1. AQO uses the straight-line method to amortize bond discountor premium. Its annual accounting period ends on December 31. What is the carrying amount of the bonds payable onDecember 31, 2019?a. P4,910,000 c. P4,900,000b. P4,945,000 d. P4,890,000arrow_forwardOn January 1, 2018, Doty Co. redeemed its 15-year bonds of $7,000,000 par value for 102. They were originally issued on January 1, 2006 at 92 with a maturity date of January 1, 2021. Doty amortizes discounts and premiums using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?arrow_forward
- Kk135. On January 1, Year 1, a company issues $350,000 of 8% bonds, due in 15 years, with interest payable semiannually on June 30 and December 31 each year. The market interest rate on the issue date is 9% and the bonds issued at $321,494. 2. If the market interest rate drops to 7% on December 31, Year 2, it will cost $379,558 to retire the bonds. Record the retirement of the bonds on December 31, Year 2. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Round your intermediate calculations to the nearest whole dollar amount.)arrow_forwardOriole Company retires its $540000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $519750. The entry to record the redemption will include a the debit of $31050 to Gain on Bond Redemption. the debit of $10800 to Premium on Bonds Payable. the credit of $20250 to Loss on Bond Redemption. the credit of $20250 to Discount on Bonds Payable.arrow_forwardOn January 1, 2022 Company K issued $1,000,000, 5% bonds for $855,000. The market rate of interest for these bonds is 7%. Interest is payable annually on December 31. If Company K uses the effective-interest method of amortizing bond discount, what would be the remaining unamortized bond discount at December 31, 2022? A. $135,150 B. $235,000 C. $238,050 D. $134,500arrow_forward
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