P14-7 (Entries for Life Cycle of Bonds) On April 1, 2014, Seminole Company sold

Question

P14-7 (Entries for Life Cycle of Bonds) On April 1, 2014, Seminole Company sold 15,000 of its 11%, 15-year, $1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the EFFECTIVE INTEREST RATE method with a 12% market rate of bond discount amortization. On March 1, 2015, Seminole took advantage of favorable prices of its stock to extinguish 6,000 of the bonds by issuing 200,000 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash. The companys stock was selling for $31 per share on March 1, 2015. Instructions Prepare the journal entries needed on the books of Seminole Company to record the following. (a)April 1, 2014: issuance of the bonds. (b) October 1, 2014: payment of semiannual interest. (c)December 31, 2014: accrual of interest expense. (d) March 1, 2015: extinguishment of 6,000 bonds. (No reversing entries made.)

Explanation / Answer

Issue Price: Par value of bonds 15,000,000 Cash interest paid (15000000*11%*6/12) 825000 Annuity PVF at 6% for 30 periods 13.7648 PVF at 6% for 30th period 0.17411 Present value of Bonds 2611650 Present value of cash interest 11355960 Issue price 13967610 Amort Chart Date Cash int. Int. exp. Discount Unamort Carrying Value Amortized Discount of bonds 01.04.14 1032390 13967610 01.10.14 825000 838057 13057 1019333 13980667 01.04.15 825000 838840 13840 1005493 13994507 Cash interest to be paid on 01.01.15 275000 (6000000*11%*5/12) Discount to be amortized 4613 (13840*5/6*6000/15000) Loss on retirement of Bonds Par value of bonds redeemed 6000000 Less: Unamortized discount 403120 (1019333*6000/15000 -4613) Book value of bonds to be redeemed 5596880 Amount paid on redemption 6200000 (200000 shares @31) Loss on retirement of Bonds 603120 Journal entries: Date Accounts title and explanations Debit $ Credit $ 01.04.14 Cash account Dr. 13967610 Discount on issue of bonds Dr. 1032390     Bonds payable 15,000,000 01.10.14 Interest expense Dr. 838057     Cash account 825000     Discount on bonds payable 13057 31.12.14 Interest expense Dr. 419420      Interest payable (825000*3/6) 412500      Discount on Bonds payable (13840*3/6) 6920 01.03.15 Interest expense Dr. (110000+1845) 111845 Interest payable Dr. (412500*6000/15000) 165000      Cash account 275000      Discount on bonds payable (4613 - 6920*6/15) 1845 01.03.15 Bonds payable Dr. 6,000,000 Loss on retirement of bonds Dr. 603120      Discount on bonds payable 403120      Common Stock Capital (200000*10) 2000000      Additional paid in capital (200000*21) 4200000

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