Presented below are three independent situations. 1. Wakarusa Corporation retire

Question

Presented below are three independent situations. 1. Wakarusa Corporation retired $126,000 face value, 14% bonds on June 30, 2012, at 104. The carrying value of the bonds at the redemption date was $122,220. The bonds pay semiannual interest, and the interest payment due on June 30, 2012, has been made and recorded. 2. Pin Oak Inc. retired $142,100 face value, 12.5% bonds on June 30, 2012, at 96. The carrying value of the bonds at the redemption date was $144,300. The bonds pay semiannual interest, and the interest payment due on June 30, 2012, has been made and recorded. 3. Mishawaka Company has $75,200, 9%, 12-year convertible bonds outstanding. These bonds were sold at face value and pay semiannual interest on June 30 and December 31 of each year. The bonds are convertible into 30 shares of Mishawaka $10 par value common stock for each $1,000 worth of bonds. On December 31, 2012, after the bond interest has been paid, $42,000 face value bonds were converted. The market value of Mishawaka common stock was $48 per share on December 31, 2012. For each independent situation above, prepare the appropriate journal entry for the redemption or conversion of the bonds.

Explanation / Answer

If the carrying amount is more than the redemption price, there is a gain; if it is less there is a loss. Also, if the carrying amount is more than the face value, the bonds were issued at a premium; if it is less, they were issued at a discount.
a)
Redemption price = 126,000 x 104% = 131,040
Carrying value = 122,220
131,040 - 122,220 = 8820 Loss
So write down what you know. You know you will debit Bonds Payable for 126,000 to take it off the books. You also know there is loss of 8820, and losses are debits. You also know that you will credit cash for 131,040, the amount paid for the redemption. So now you have:
Dr Bonds Payable 126,000
Dr Loss on Redemption of Bonds 8820
Cr Cash 131,040
In order to have debits and credits equal, you will need to make a credit entry for7140. Since the carrying value was less than the face value, the entry will be to Discount on Bonds Payable.
Cr Discount on Bonds Payable 7140

using the above information you can solve the remaining questions.

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