Holiday Company issued its 7%, 25-year mortgage bonds in the principal amount of

Question

Holiday Company issued its 7%, 25-year mortgage bonds in the principal amount of $3,055,000 on January 2, 2000, at a discount of $164,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 105% of the principal amount, but it did not provide for any sinking fund.

On December 18, 2014, the company issued its 12%, 20-year debenture bonds in the principal amount of $4,136,000 at 103, and the proceeds were used to redeem the 7%, 25-year mortgage bonds on January 2, 2015. The indenture securing the new issue did not provide for any sinking fund or for redemption before maturity.

(a) Prepare journal entries to record the issuance of (1) the 12% bonds and (2) the redemption of the 7% bonds. (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.)

(b) Indicate the income statement treatment of the gain or loss from redemption.

The (loss) is reported as (Extraordinary Loss/Ordinary Loss)

Explanation / Answer

First we have to see how much unamortized amount of dicount is left on 7% mortgage bond Dicount=$164000 will be amortized in 25 years on SLM basis so each year amortized= 164000/25= $6560 So, for 15 years 2000-2014 it has amortized 6560*15= 98400 Unamortized amount of discount (164000-98400) 65600 In December 2014 Account Title Dr Cr 18,Der 2014 Cash 4260080 12% Debenture Bonds 4136000 Premium on 12% Debenture Bonds(4136000/100*3) 124080 (Being debenture bond issued at 103 at prmium of $3) and there is loss of the difference amount) 2-Jan-15 7% Mortgage Bond $3,055,000 Loss on Redemption/Retirement on Bond $218,350 Cash (3055000/100*105 as this is given on premium) 3207750 Discount on issue of Mortgage Bond(calculated above) 65600 ( the proceeds were used to redeem Mortgage bond, and it will at $105 per bond,and the unamortized discount is credited to make it balance nil and loss is recognized being the difference between cash paid , discount from 7% mortgage bond) Ans 2 The loss is reported as ordinary loss as it is an ordinary activity of buisness to issue, redeem, retire the bonds

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