Exercise 10-12 Presented below are three independent situations 1. Longbine Corp

Question

Exercise 10-12 Presented below are three independent situations 1. Longbine Corporation redeemed $132,000 face value, 13% bonds on June 30, 2017, at 107. The carrying value of the bonds at the redemption date was $117,500. The bonds pay annual 2. Tastove Inc. redeemed $170,000 face value, 18% bonds on June 30, 2017, at 98. The carrying value of the bonds at the redemption date was $171,000. The bonds pay annual interest, 3. Precision Company has $87,000, 8%, 12-year convertible bonds outstanding. These bonds were sold at face value and pay annual interest on December 31 of each year. The bonds are interest, and the interest payment due on June 30, 2017, has been made and recorded. and the interest payment due on June 30, 2017, has been made and recorded convertible into 35 shares of Precision $10 par value common stock for each $1,000 worth of bonds. On December 31, 2017, after the bond interest has been paid, $22,000 face value bonds were converted. The market price of Precision common stock was $41 per share on December 31, 2017 For each independent situation above, prepare the appropriate journal entry for the redemption or conversion of the bonds. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Explanation / Answer

Solution:

Part 1 –

Redemption Value of the Bonds = Face Value x 107% = $132,000 x 107% = $141,240

Carrying Value of the bonds at the redemption date = $117,500

Carrying Value of the bonds is less than face value, it means the bonds was issued at discount. And the portion of unamortized discount = Face Value – Carrying Value of the bonds

= $132,000 - $117,500

= $14,500

Premium paid on redemption of bonds payable = Redemption Value – Carrying Value

= $141,240 - $117,500

= $23,740

We need to close all the accounts i.e. Discount on Bonds Payable (unamortized), Bonds Payable

Date

General Journal

Debit

Credit

June.30

Bonds Payable (face value)

$132,000

Loss on Redemption (Premium Paid on Redemption)

$23,740

Discount on Bonds Payable

$14,500

Cash

$141,240

Part 2 –

Redemption Value of the Bonds = Face Value x 98% = $170,000 x 98% = $166,600

Carrying Value of the bonds at the redemption date = $171,000

Carrying Value of the bonds is higher than face value, it means the bonds was issued at Premium and the portion of unamortized premium = Carrying Value of the bonds – Face Value

= $171,000 – 170,000

= $1,000

Gain on redemption of bonds payable = Carrying Value - Redemption Value

= $171,000 – 166,600

= $4,400

Date

General Journal

Debit

Credit

June.30

Bonds Payable (face value)

$170,000

Premium on Bonds Payable (unamortized portion)

$1,000

Gain on Redemption of Bonds

$4,400

Cash (Redemption Value)

$166,600

Part 3 –

Converted Bonds Value = $22,000

Number of Bonds Converted into Common Stock = $22,000 / 1,000 = 22 Bonds

Conversion Ratio = 35 Shares from 1 bonds

Number of Common Stock from Bond Conversion = 35 Shares x 22 = 770 Shares

Journal Entry

Date

General Journal

Debit

Credit

Dec.31

Bonds Payable (face value)

$22,000

Common Stock (770 Shares x Par Value $10)

$7,700

   Paid in Capital in Excess of Par Value - Common Stock (bal fig)

$14,300

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Date

General Journal

Debit

Credit

June.30

Bonds Payable (face value)

$132,000

Loss on Redemption (Premium Paid on Redemption)

$23,740

Discount on Bonds Payable

$14,500

Cash

$141,240

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