4. (TCO D) Prepare journal entries to record the following retirement. (Show com

Question

4. (TCO D) Prepare journal entries to record the following retirement. (Show computations and round to the nearest dollar). The December 31, 2010 balance sheet of Wolfe Co. included the following items:
7.5% bonds payable due December 31, 2018     $1,200,000
            Unamortized discount on bonds payable            48,000

The bonds were issued on December 31, 2008 at 95, with interest payable on June 30 and December 31. (Use straight-line amortization)

            On April 1, 2011, Wolfe retired $240,000 of these bonds at 101 plus accrued interest. (Points : 20)

Explanation / Answer

No. of Bonds issued on 31st December 2008= $ 1,200,000/ 100

= 12,000

Discount on bonds issued as on 31st December 2008 = $ (100-95)*12,000

= $ 60,000

Since unamortised discount on bonds as on 31st December 2010 = $ 48000 (2 years since issuance of bond)

Therefore bond is issued for 10 years i.e. each year bond is amortised using staright line amortization (60,000-48,000)/2] = $ 6,000

On 1st April 2011, bonds of $ 240,000 having face value of $ 100 is retired at a premium of $ 1 each bond.

So Journal entry on 1st April 2011 would be:-

7.5% bonds A/c Dr. 240,000

Premium on redemption of bond A/c Dr. 2,400

Interest on Bonds A/c Dr. (240,000*7.5%*3/12) 4,500

To Bank A/c. 246,900

(Being bonds retired at a premium and interest paid for proportionate period)

Profit & Loss A/c Dr. (2400*5*8/10) $ 9,600

To Discount on issue of debenture A/c. $ 9,600

(Being unamortised discount on retired bonds transferred to Profit & Loss A/c for the retired bonds)

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