On January 1, 2018, Shay issues $300,000 of 10%, 15-year bonds at a price of 97.
ID: 2405457 • Letter: O
Question
On January 1, 2018, Shay issues $300,000 of 10%, 15-year bonds at a price of 97.75. Six years later, on January 1, 2024, Shay retires 20% of these bonds by buying them on the open market at 105.25. All interest is accounted for and paid through December 31, 2023, the day before the purchase. The straight-line method is used to amortize any bond discount. What is the carrying (book) value of the bonds and the carrying value of the 20% soon-to-be-retired bonds as of the close of business on December 31, 2023? How much did the company pay on January 1, 2024, to purchase the bonds that it retired? What is the amount of the recorded gain or loss from retiring the bonds? Prepare the journal entry to record the bond retirement at January 1, 2024.
Explanation / Answer
Discount on the bonds payable at the time of issue = 300000-300000*97.75% = 6750 Annual amortization = 6750/15 = 450 Discount amortized in 6 years upto January 1, 2024 = 450*6 = 2700 Balance of discount on bonds payable as on 31 December, 20123 = 6750-2700 = 4050 ANSWERS: Carrying value of the bonds payable = 300000-4050 = 295950 Carrying value of the bonds to be retired = 295950*20% = 59190 Amount paid on purchase of the bonds = 300000*20%*105.25% = 63150 Loss on retirement: Amount paid - Carrying value = 63150-59190 = 3960 Journal entry as on January 1, 2024: Bonds payable 60000 Loss on retirement of bonds 3960 Discount on bonds payable 810 Cash 63150
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