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Intermediate Question

Please help me on this!

Holiday Company issued its 9 %, 25-year mortgage bonds in the principal amount of $ 3,283,000 on January 2, 1998, at a discount of $ 166,000 , which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 105 % of the principal amount, but it did not provide for any sinking fund.

On December 18, 2012, the company issued its 10 %, 20-year debenture bonds in the principal amount of $ 4,147,000 at 103 , and the proceeds were used to redeem the 9 %, 25-year mortgage bonds on January 2, 2013. The indenture securing the new issue did not provide for any sinking fund or for retirement before maturity.

(a) Prepare journal entries to record the issuance of (1) the 10 % bonds and (2) the retirement of the 9 % bonds.

Why don't you attempt the problem and we will tell you if you are right

For the JE to record the issuance of (1) the 10% bond, I got:

Cash 3,117,000
Discount on Mortgage Payable 166,000
Mortgage Payable 3,283,000

Is that correct?

I'm confused on how to approach the second one. I calculated the cash received from the debenture bond the company issued, which is $4,271,410 and the premium on the bond is $124,410 which results in a $4,147,000 bond payable. Is the question asking how much of the cash amount received from the debenture bond used to redeem the 25-year mortgage bond? I'm confused as to how to approach recording the issuance of the retirement of the 9% bond.

Quote:

Originally Posted by tubb1988

Please help me on this!

Holiday Company issued its 9 %, 25-year mortgage bonds in the principal amount of $ 3,283,000 on January 2, 1998, at a discount of $ 166,000 , which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The indenture securing the issue provided that the bonds could be called for redemption in total but not in part at any time before maturity at 105 % of the principal amount, but it did not provide for any sinking fund.

On December 18, 2012, the company issued its 10 %, 20-year debenture bonds in the principal amount of $ 4,147,000 at 103 , and the proceeds were used to redeem the 9 %, 25-year mortgage bonds on January 2, 2013. The indenture securing the new issue did not provide for any sinking fund or for retirement before maturity.

(a) Prepare journal entries to record the issuance of (1) the 10 % bonds and (2) the retirement of the 9 % bonds.

Your answer to the first part is correct if you were journaling the issue of the 9% Bonds this is not what you are asked to do. It is important to read the question thouroughly.

The companies second issue is at a premium

The company when redeeming the first bond issue early must pay a premium

Between 1998 and 2013 the company amortised the discount on the first issue in it's accounts

So try again

For the (1) JE, would it be..

Cash 4,271,410
Premium on Bond 124,410
Bond Payable 4,147,000

I am still really confused on how to approach the (2) JE..

Quote:

Originally Posted by tubb1988

For the (1) JE, would it be..

Cash 4,271,410
Premium on Bond 124,410
Bond Payable 4,147,000

I am still really confused on how to approach the (2) JE..

The bonds were redeemed at a premium this means it was more expensive that is the first part of the journal \the second part is to retire the unamortised part of the first issue discount do you understand what the term par means prices quoted on bonds are referenced to par value

Quote:

Originally Posted by paraclete

The bonds were redeemed at a premium this means it was more expensive that is the first part of the journal \the second part is to retire the unamortised part of the first issue discount do you understand what the term par means prices quoted on bonds are referenced to par value

Yes, I understand what the par is that is what it is quoted to be. For the amortization, do I just take 9% of the $3,283,000 and that is how much it is amoritzed each year?

You need to do a course on comprehension. 9% is the interest rate, the yield if you will, you calculate the number of years since the bonds were issued to the redemption date and use that as a proportion of the term to determine how much of the discount would have been amortised previously. It is now necessary to write the balance off in the current year