PDA

View Full Version : Issuing bonds and straight line amortization


Goddesss
Nov 22, 2009, 04:45 PM
Hi, if anyone could check out what I have done so far and let me know if I am going down the right track.

Prepare journal entries to record the following transactions relating to long-term bonds of Grier, Inc. (Show computations.)

a) On June 1, 2006, Grier, Inc. issued $600,000, 6% bonds for $587,640. Interest is payable semianually on Feb. 1 and Aug. 1 with the bonds maturing on Feb. 1, 2016. The bonds are callable at 102.

b) On Aug. 1, 2006, Grier paid interest on the bonds and recorded amortization. Grier uses straight-line amortization.

c) On Feb. 1, 2008, Grier paid interest and recorded amortization on all of the bonds, and purchased $360,000 of bonds at the call price.


These are the entrie I have o far.

a)
6/1/06 Cash 587,640
Discount on Bonds Payable 12,360
Bonds Payable 600,000


b)
8/1/06 Interest Expense 6,618
Cash(600,000 x 6% x 2/12) 600,000
Discount on Bonds Payable 618
($12,360/20)


I am unsure about the last entry. As soon as I figure it out will post it.

c)
2/1/08 ?

rehmanvohra
Nov 23, 2009, 06:57 AM
There are quite a few missing points:

1. What is the date of the Bond? If we look at the interest payment dates it appears that Bonds were issued on Feb 1, 2006.

In that case, the collection from the proceeds of bonds will include interest for four months Feb to May, that is $12,000.

2. The question states that the bonds were sold for $587,640. If this amount includes interest for 4 months then the entry will be:

Debit Cash $587,640
Debit Discount on Bonds $24,360
Credit Interest expense $12,000
Credit 6% Bonds Payable $600,000

Discount on bonds will be amortized over the remaining period of 116 months (10 x 12 - 4) or $210 per month. On Aug 1 for two months.

Now about part c

You will record interest expense and amortization of bonds as usual. For the cancellation of bonds of $360,000 on 2/1/2008

Debit Bonds Payable $360,000
Debit Premium on redemption of bonds 7,200
Credit Cash 367,200

Since 8 years of bond life remains, the unamortized bond discount account will also be adjusted as applicable to $360,000.

Discount on issue of bonds $24,360
Amortized for 18 months x $218 = $3,780
Balance on 2/1/2008 $20,580
$360,000 is 60% of the face value of bonds, hence $12,348 will be extinguished.

I have excluded year end accruals as the year end date is not given.