On April 1, 2014, Seminole Company sold 15,120 of its 11%, 15-year, $1,000 face
ID: 2426742 • Letter: O
Question
On April 1, 2014, Seminole Company sold 15,120 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 straight-line method of bond discount amortization. On March 1, 2015, Seminole took advantage of favorable prices of its stock to extinguish 6,600 of the bonds by issuing 217,800 shares of its $10 par value common stock. At this time, the accrued interest was paid in cash. The company’s stock was selling for $32 per share on March 1, 2015.
Prepare the journal entries needed on the books of Seminole Company to record the following.
Explanation / Answer
a.
The bonds are issued at less than its face value. The difference between the face value and the value at which the bonds are issued is discount on bonds issued. The journal entry on the date of issuance of bond would be as under:
15,120 Bonds issued at 97% of the face value, the cash received on bonds issuance would be as under:
1st April 2014
Cash
$14,666,400
Discount on bonds payable
$453,600
Bonds Payable
$15,120,000
(Issuance of 11% bonds at discount)
b.
The interest payable on bonds payable semiannually at the rate of 11% which is calculated as under:
Amortization of bonds discount is also calculated semiannually which is as under:
The journal entry for payment of interest on bonds semiannually as on 1st October 2014 is as under:
The amortization of bonds discount is often recorded at the time of payment of semiannual interest therefore the amortization of discount on bonds payable is credited to the account.
1st Oct. 2014
Interest on bonds payable
$831,600
Discount on bonds payable
$15,120
Cash
$816,480
(payment of interest on bonds and amortization of discount on bonds recorded)
c.
The journal entry for accrual of interest expense on the date on 31st December 2014 is as under:
31st Dec. 2014
Interest on bonds payable
$831,600
Discount on bonds payable
$15,120
Interest payable
$816,480
(Accrued interest on bonds and amortization of discount on bonds recorded)
d.
The journal entry for extinguishment of 6,600 bonds as on 1st March 2015 is as under:
The unamortized discount on bond as on the date of extinguishment is as under:
Share capital is issued by extinguishment of bonds which is 217,800 shares at a face value of $10 each.
Profit on extinguishment is as under:
The journal entry for extinguishment of bond is as under:
1st Mar. 2015
Bonds payable
$6,600,000
Discount on bonds payable
$1,84,800
Share capital
$2,178,000
Profit on extinguishment
$4,237,200
(Extinguishment of bonds by issuance of shares at the face value of $10 each)
1st April 2014
Cash
$14,666,400
Discount on bonds payable
$453,600
Bonds Payable
$15,120,000
(Issuance of 11% bonds at discount)
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