Exercise 14-12 On January 2, 2012, Skysong Corporation issued $2,050,000 of 10%
ID: 2343337 • Letter: E
Question
Exercise 14-12 On January 2, 2012, Skysong Corporation issued $2,050,000 of 10% bonds at 96 due December 31, 2021. Interest on the bonds is payable annually each December 31. The discount on the bonds is also being amortized on a straight-line basis over the 10 years. (Straight-line is not materially different in effect from the preferable “interest method”.) The bonds are callable at 101 (i.e., at 101% of face amount), and on January 2, 2017, Skysong called $1,230,000 face amount of the bonds and redeemed them. Ignoring income taxes, compute the amount of loss, if any, to be recognized by Skysong as a result of retiring the $1,230,000 of bonds in 2017. (Round answer to 0 decimal places, e.g. 38,548.) Loss on redemption $ Prepare the journal entry to record the redemption. (Round answers to 0 decimal places, e.g. 38,548. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit January 2, 2017
Explanation / Answer
a) Discount on bonds on Face amount of $1,230,000 = $1,230,000*4%(i.e. 100-96)
= $49,200
This amount of $49,200 will be amortized equally over the life of bonds (i.e. 10 years).
$49,200/10 yrs = $4,920 per year
Unamortized discount on Jan 2, 2017 (i.e. after 5 yrs) = $49,200 - ($4,920*5 years)
= $49,200 - $24,600 = $24,600
Redemption price of bonds = $1,230,000*101% = $1,242,300
Loss on Redemption = Redemption Price+Unamortized Discount-Face Value of Bonds
= $1,242,300+$24,600-$1,230,000 = $36,900
b) Journal entry to record the redemption is shown as follows:-
Journal Entry (Amounts in $)
Date Account Titles and Explanation Debit Credit Jan 2, 2017 Bonds Payable (Face Value of Bonds) 1,230,000 Loss on redemption on Bonds (Bal. fig) 36,900 Discount on Bonds Payable (Unamortized balance) 24,600 Cash (Redemption amount) 1,242,300 (To record the redemption)Related Questions
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