The following information applies to the questions displayed below.] Hayden Co.

ID: 2582497 • Letter: T

Question

The following information applies to the questions displayed below.]

Hayden Co. has outstanding $35 million face amount of 7% bonds that were issued on January 1, 2010, for $35,620,000. The 20-year bonds mature on December 31, 2029, and are callable at 104 (that is, they can be paid off at any time by paying the bondholders 104% of the face amount).

b-2. Assume that the bonds are called on December 31, 2016. Record the journal entry to show the effect of the retirement of the bonds. (Hint: Calculate the amount paid to bondholders; determine how much of the bond premium would have been amortized prior to calling the bonds; and then calculate the gain or loss on retirement.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

Solution:

We need to do first primary working in order to get the correct answer.

Face Value of the bonds = $35,000,000

Issue Price of the bonds = $35,620,000

Issue Price is higher than face value, it means bonds are issued at PREMIUM.

Premium on Bonds Payable = 35,620,000 – 35,000,000 = 620,000

Assumptions:

- It is assumed that the Premium on Bonds Payable is amortized using STRAIGHT LINE METHOD. IN this method Premium or Discount is amortized over the maturity period of the bonds.

- Interest is paid annually.

- It is also assumed that the interest expenses are recorded for the year ending Dec 31, 2016 and the premium are amortized correctly.

Annual Amortization of Premium = Total Premium / Period to maturity = 620,000 / 20 = $31,000

Requirement b-2

Called of date of the bonds = Dec 31, 2016

Issued date of the bonds = Jan 1, 2010

It means after 7 years the bonds are called on.

We need to calculate the Carrying Value (Book Value) of the bonds on Dec 31, 2016

Carrying Value of the bonds on Dec 31, 2016 = Face Value of the bonds + Unamortized Premium

= 35,000,000 + (Total Premium 620,000 – Amortized Premium in 7 years 31,000*7)

= 35,000,000 + 403,000

= $35,403,000

The amount paid to bondholders on called Dec 31, 2016 = Face Value x 104% = 35,000,000 x 104% = $36,400,000

Carrying Value of the bonds on Dec 31, 2016 = $35,403,000

Carrying Value of the bonds are less than Called Value of the bonds, it means higher amount paid to bondholders on calling of the bonds.

Company will record Loss on Retirement of Bonds = 36,400,000 – 35,403,000 = $997,000

Following Journal Entry is to be passed

Date

General Journal

Debit

Credit

Dec.31,2016

Bonds Payable

$35,000,000

Premium on Bonds Payable

Unamortized Portion as calculated above)

$403,000

Loss on Retirement of Bonds (bal fig.)

$997,000

Cash (35,000,000*104%)

$36,400,000

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you